Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
ResortQuest is one of the world's leading providers of vacation condominium
and home rental property management services in premier destination resorts
located in the United States and Canada. We have developed the first and only
branded international network of vacation rental properties and currently offer
management services to over 20,000 rental properties. Our operations are in more
than 50 premier resort locations in the Beach, Hawaii, Mountain and Desert
geographical regions.
Our rental properties are generally second homes or investment properties
owned by individuals who assign us the responsibility of managing, marketing and
renting their properties. We earn management fees as a percentage of the rental
income from each property, but have no ownership interest in the properties. In
addition to the vacation property management business, we offer real estate
brokerage services and other rental and property owner services. We have also
developed an industry leading proprietary vacation rental management software,
First Resort Software, with over 900 licenses sold to vacation property
management companies.
We provide value-added services to both vacationers and property owners.
For vacationers, we offer the value, convenience and features of a condominium
or home while providing many of the amenities and services of a hotel. For
property owners, we offer a comprehensive package of marketing, management and
rental services designed to enhance rental income and profitability while
providing services to maintain the property. Property owners also benefit from
our QuestPerks program, which offers benefits such as discounts on lodging, air
travel and car rentals. To manage guests' expectations, we have developed and
implemented a five-tier rating system that segments our property portfolio into
five categories: Quest Home, Platinum, Gold, Silver and Bronze.
Utilizing our marketing database, we market our properties through national
cable television ad campaigns and various other media channels. We have
significant distribution through ResortQuest.com, our proprietary website
offering "real-time" reservations, and our inventory distribution partnerships
that include Expedia, Travelocity, Condosaver.com, retail travel agents, travel
wholesalers and others. We are constantly enhancing our website to improve the
booking experience for leisure travelers. In addition to detailed property
descriptions, virtual tours, interior and exterior photos, floor plans and local
information, vacationers can search for properties by date, activity, event or
location; comparison shop among similar vacation rental units; check for special
discounts and promotions; and obtain maps and driving directions.
RESULTS OF OPERATIONS
Our revenues are derived primarily from property management fees on
vacation condominium and home rentals and fees from additional services provided
to vacationers and property owners. We receive property management fees when the
properties are rented, which are generally a percentage of the rental price of
the vacation property. Management fees range from approximately 3% to over 40%
of gross lodging revenues collected based upon the type of services provided by
us to the property owner and the type of rental units managed. Revenues are
recognized ratably over the rental period based on our proportionate share of
the total rental price of the vacation condominium or home. For the year ended
December 31, 2002, we recognized $83.7 million of property management fees,
representing 21% of total gross lodging revenues and 54% of our 2002 revenues
before the $36.5 million in other revenues from managed entities. Additional
services such as reservations, housekeeping, long-distance telephone, ski lift
tickets, beach equipment rental and pool cleaning are charged separately and
recorded as service fees revenue. During 2002, we recognized $44.7 million of
service fees, representing 11% of total gross lodging revenues and 29% of our
2002 revenues before other revenues from managed entities. The remaining $25.4
million of 2002 revenues are derived from other sources, including the sale and
service of First Resort Software, net broker commissions on real estate sales
and food & beverage sales. During 2002, we expanded our real estate operations
into two new areas including Scottsdale, Arizona and Keystone, Colorado,
capitalizing on the low cost of entry afforded us by our existing vacation
rental operations.
During the quarter ended March 31, 2002, we changed our method of
accounting for reimbursable costs to conform to the Financial Accounting
Standards Board's Emerging Issues Task Force Consensus No. 01-14, "Income
Statement Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred" ("EITF No. 01-14"), issued earlier this year and effective
for us on January 1, 2002. As a result, certain reimbursements received are
recorded as revenue and the costs incurred on behalf of managed associations and
properties are recorded as expenses. These costs, which relate primarily to
payroll costs at managed properties and associations where we are the employer,
are reflected in other revenue and expenses from managed entities in the
consolidated Statements of Operations. Revenues and expenses for the prior
periods have been reclassified to conform with the current year presentation. As
the reimbursements are made based upon the costs incurred with no added margin
resulting in the expenses and related revenues being identical, the adoption of
EITF No. 01-14 did not have any effect on our operating income, total or per
share net income, cash flows or financial position.
Direct operating expenses include direct compensation, telecommunication
expenses, housekeeping supplies, printing, marketing and food & beverage costs.
Compensation includes salaries, wages, bonuses and benefits for employees
involved with the rental or maintenance of the rental units, housekeeping,
marketing, reservations and food & beverage services. Telecommunication costs
result primarily from the cost of toll-free numbers.
General and administrative expenses consist primarily of salaries, wages,
bonuses and benefits for general managers as well as other non-operational
personnel, fees for professional services, rent and other general office
expenses.
Our operating results are highly seasonal due to the geographical
dispersion of the resort locations in which we operate. The results of
operations are subject to quarterly fluctuations caused primarily by the
seasonal variations in the vacation rental industry, with peak seasons dependent
on whether the resort is primarily a summer or winter destination. Our financial
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Exhibit 13
results are discussed on a consolidated basis, but due to the seasonal nature of
our operations, our results are also discussed by geographic region with Other
representing our corporate and ResortQuest Technologies operations. For better
analysis, financial operating changes will include discussions with "same -
store" comparisons. Same-store comparisons exclude the impact of significant
acquisitions completed since the first day of the earliest period being
discussed.
Due to the recent challenges facing leisure travel companies presented by
the softening economy and the impact of the tragic events of September 11, 2001,
our revenues have declined over prior year as leisure travel demand has
softened. In order to maintain occupancy levels, we charged lower room rates,
which resulted in lower overall revenues. Despite these industry-wide
challenges, we were able to reduce costs, maintain occupancy and continue to
position ResortQuest to realize significant growth in the future.
CONSOLIDATED
The following table sets forth the condensed consolidated results of
operations for the years ended December 31, 2000, 2001 and 2002.
(dollars in thousands) 2000 2001 2002
---------------- ---------------- ----------------
Revenues $183,261 100.0% $192,955 100.0% $190,241 100.0%
Direct operating expenses 80,314 43.8 83,838 43.5 83,607 44.0
General and administrative expenses 40,940 22.4 57,663 29.9 66,484 34.9
Other expenses from managed entities 31,247 17.1 31,999 16.6 36,504 19.2
-------- ----- -------- ----- -------- -----
Operating income before depreciation
and amortization 30,760 16.7 19,455 10.0 3,646 1.9
Depreciation 3,550 1.9 5,209 2.7 6,465 3.4
Goodwill amortization 4,933 2.7 5,670 2.9 -- --
-------- ----- -------- ----- -------- -----
Operating income 22,277 12.1 8,576 4.4 (2,819) (1.5)
Interest and other expense, net 4,814 2.6 4,647 2.4 6,233 3.3
Provision for income taxes 7,857 4.3 2,328 1.2 (1,848) (1.0)
-------- ----- -------- ----- -------- -----
Income (loss) before the cumulative effect
of a change in accounting principle $ 9,606 5.2% $ 1,601 0.8% $ (7,204) (3.8)%
======== ===== ======== ===== ======== =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 -
Consolidated
Revenues. Revenues decreased $2.7 million, or 1.4%, from $193.0 million in
2001 to $190.2 million in 2002. Excluding other revenue from managed entities,
revenues decreased $7.2 million, or 4.5%, from $161.0 million to $153.7 million,
due to a 5.1% decrease in gross lodging revenues primarily driven by a lower
Average Daily Rate ("ADR").
Direct Operating Expenses. Direct operating expenses decreased $231,000, or
0.3%, from $83.8 million in 2001 to $83.6 million in 2002, primarily due to cost
reduction initiatives announced during 2001 that focused on more efficient
staffing. As a percentage of revenues, direct operating expenses increased 0.5
points due to the decline in revenues.
General and Administrative Expenses. General and administrative expenses
increased $8.8 million, or 15.3%, from $57.7 million in 2001 to $66.5 million in
2002, primarily due to the $15.1 million in unusual items and other charges
recorded in 2002. Excluding the impact of these charges recorded in 2002 and the
$4.7 million in unusual items and other charges recorded in 2001, general and
administrative expenses decreased $1.6 million, or 3.0%, due to cost control
initiatives. The unusual items and other charges recorded during the year relate
to a non-cash write-down of $10.6 million of certain capitalized software
development costs and intangibles related to the Company's vacation rental
management software, First Resort Software, severance and employee-related
charges of approximately $2.6 million, approximately $1.1 million in
professional fees and expenses related to a study to explore financing and
strategic growth alternatives and an offer to acquire the Company that was
determined by the Board, after appropriate review, not to be in the best
interests of the Company and its shareholders, and approximately $760,000 of
other charges related to property and office closings and consolidations. The
$10.6 million write-down relates to the Company's change in strategy that
included a redefinition of its target market for First Resort Software. Prior to
this strategy shift, the latest version of First Resort Software was being
designed to meet the needs of essentially all companies in our industry. The new
strategy is to focus on the needs of small to medium-sized property management
companies, which make up the majority of the industry. This change necessitated
a write-down of certain capitalized development costs and intangibles related to
the software as recorded on the Company's balance sheet. The severance and
employee-related charges primarily relate to the fourth quarter senior
management changes, with the majority of these costs being paid out over the
next several years. The property and office closings include the disposal of
Shoreline Properties in Ohio and the consolidations and closings of offices in
Dillon, Lafayette, and Basalt, Colorado; Memphis, Tennessee; and Hilton Head,
South Carolina. The Company will realize significant payroll and lease expense
savings through these closings and consolidations.
Other Expenses From Managed Entities. Other expenses from managed entities
increased $4.5 million, or 14.1%, from $32.0 million in 2001, to $36.5 million
in 2002, due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by the entities under our management (see "New Accounting
Pronouncements"). The reimbursements for these amounts are reflected in
revenues. As a percentage of revenues, other expenses from managed entities
increased 2.6 points due to a decrease in same-store revenues.
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Exhibit 13
Depreciation. Depreciation increased $1.3 million, or 24.1%, from $5.2
million in 2001 to $6.5 million in 2002, primarily due to increased technology
capital expenditures related to enhancements to our website and the release of
the new version of First Resort Software. As a percentage of revenues,
depreciation increased 0.7 points due to the increase in technology capital
expenditures.
Goodwill Amortization. Upon the adoption of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see "New Accounting
Pronouncements").
Interest and Other Expense, Net. Interest expense, net of interest income,
increased $1.6 million, or 34.1%, from $4.6 million in 2001 to $6.2 million in
2002, primarily due to increased debt levels and an increased weighted average
borrowing rate. As a percentage of revenues, interest expense increased 0.9
points due to the increase in borrowing costs.
Provision for Income Taxes. Provision for income taxes decreased $4.2
million, or 179.4%, from a $2.3 million expense in 2001 to a $(1.8) million
benefit in 2002, primarily due to a decline in taxable income.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 -
Consolidated
Revenues. Revenues increased $9.7 million, or 5.3%, from $183.3 million in
2000 to $193.0 million in 2001. Excluding other revenues from managed entities,
revenues increased $9.0 million, or 6.0%, from $152.0 million in 2000, to $161.0
million in 2001, primarily due to 2001 acquisitions and the annualized impact of
the 2000 acquisitions. During 2001, we completed five significant acquisitions
in the resort areas of Bradenton, Longboat Key, New Port Richey, Naples and
Sarasota, Florida; Steamboat Springs, Colorado; Gatlinburg and Pigeon Forge,
Tennessee; and the Outer Banks of North Carolina. Excluding the impact of the
2001 acquisitions and the annualized impact of the 2000 acquisitions, revenues
decreased $7.7 million, or 5%, due to a 4.4% decrease in same-store gross
lodging revenues driven by a 4.9 point decrease in occupancy.
Direct Operating Expenses. Direct operating expenses increased $3.5
million, or 4.4%, from $80.3 million in 2000 to $83.8 million in 2001, primarily
due to 2001 acquisitions and the annualized impact of the 2000 acquisitions.
Excluding the impact of the 2000 and 2001 acquisitions, direct operating
expenses decreased 6% due to the decrease in housekeeping costs related to
reduced occupancy and increased operating efficiencies.
General and Administrative Expenses. General and administrative expenses
increased $16.8 million, or 40.8%, from $40.9 million in 2000 to $57.7 million
in 2001, primarily due to 2001 acquisitions, the annualized impact of our 2000
acquisitions and the $4.7 million in unusual items and other charges recorded in
2001. These charges primarily represent a non-cash write-down of certain
previously released First Resort Software versions, deferred costs for
acquisition candidates that will no longer be pursued, certain legal charges and
a severance accrual. Excluding the impact of these charges, general and
administrative expenses increased $6.5 million, or 17%, due to increased
insurance costs and marketing expenditures.
Other Expenses From Managed Entities. Other expenses from managed entities
increased $752,000, or 2.4%, from $31.2 million in 2000 to $32.0 million in
2001, due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by the entities under our management (see "New Accounting
Pronouncements"). The reimbursements for these amounts are reflected in
revenues. As a percentage of revenues, other expenses from managed entities
decreased 0.5 points due to the increase in revenues.
Depreciation. Depreciation increased $1.7 million, or 46.8%, from $3.5
million in 2000 to $5.2 million in 2001, primarily due to increased technology
capital expenditures and the impact of our 2000 and 2001 acquisitions. As a
percentage of revenues, depreciation increased 0.8 points due to the decrease in
same-store revenues.
Goodwill Amortization. Goodwill amortization increased $736,000, or 15.0%,
from $4.9 million in 2000 to $5.7 million in 2001, primarily due to our 2001
acquisitions and the annualized impact of our 2000 acquisitions. As a percentage
of revenues, goodwill amortization increased 0.2 points due to the decrease in
same-store lodging revenues.
Interest and Other Expense, Net. Interest expense, net of interest income,
decreased $167,000, or 3.5%, from $4.8 million in 2000 to $4.6 million in 2001,
primarily due to a decreased average debt level and a lower weighted average
borrowing rate. As a percentage of revenues, interest expense decreased 0.2
points primarily due to the increase in revenues.
Provision for Income Taxes. Provision for income taxes decreased $5.5
million, or 70.4%, from $7.9 million in 2000 to $2.3 million in 2001, primarily
due to a decrease in taxable income.
Beach
The following table sets forth the condensed consolidated results of
operations for the years ended December 31, 2000, 2001 and 2002 for our Beach
operations in Gulf Shores, Alabama; Bethany Beach, Delaware; Anna Maria Island,
Beaches of South Walton, Bonita Springs, Bradenton, Captiva Island, Destin, Fort
Myers, Fort Myers Beach, Ft. Walton Beach, Lido Key, Longboat Key, Marco Island,
Naples, Navarre Beach, New Port Richey, Okaloosa Island, Orlando, Panama City,
Pensacola, Perdido Key, Sanibel Island, Sarasota, Siesta Key, Vanderbilt Beach
and Venice, Florida; St. Simons Island, Georgia; Nantucket, Massachusetts; Outer
Banks, North Carolina; Lake Erie Islands, Ohio; and Hilton Head Island, South
Carolina.
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Exhibit 13
(dollars in thousands) 2000 2001 2002
-------------- --------------- ---------------
Revenues $90,265 100.0% $97,493 100.0% $95,952 100.0%
Direct operating expenses 45,913 50.9 48,713 50.0 49,291 51.4
General and administrative expenses 17,658 19.6 21,329 21.9 19,681 20.5
Other expenses from managed entities 4,947 5.4 5,065 5.1 6,222 6.5
------- ----- -------- ----- ------- -----
Operating income before depreciation
and amortization 21,747 24.1 22,386 23.0 20,758 20.9
Depreciation 1,582 1.8 1,633 1.7 1,945 2.0
Goodwill amortization 2,632 2.9 3,186 3.3 -- --
------- ----- ------- ----- ------- -----
Operating income $17,533 19.4% $17,567 18.0% $18,813 18.9%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 - Beach
Revenues. Revenues decreased $1.5 million, or 1.6%, from $97.5 million in
2001 to $96.0 million in 2002. Excluding other revenue from managed entities,
revenues decreased $2.7 million, or 2.9%, from $92.4 million in 2001 to $89.7
million in 2002. This decrease is primarily due to a 4.4% decrease in same-store
gross lodging revenues driven by a 0.4 point decrease in occupancy.
Direct Operating Expenses. Direct operating expenses increased $578,000, or
1.2%, from $48.7 million in 2001 to $49.3 million in 2002, primarily due to the
full year impact from our 2001 acquisitions. As a percentage of revenues, direct
operating expenses increased 1.4 points due to a decrease in revenues.
General and Administrative Expenses. General and administrative expenses
decreased $1.6 million, or 7.7%, from $21.3 million in 2001 to $19.7 million in
2002, due to increased operating efficiencies and cost reduction initiatives. As
a percentage of revenues, general and administrative expenses decreased 1.4
points due to cost reduction initiatives.
Other Expenses From Managed Entities. Other expenses from managed entities
increased $1.2 million, or 22.8% from $5.1 million in 2001 to $6.2 million in
2002, due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by the entities under our management (see "New Accounting
Pronouncements"). The reimbursements for these amounts are reflected in
revenues. As a percentage of revenues, other expenses from managed entities
increased 1.4 points primarily due to an increase in these expenses.
Depreciation. Depreciation increased $312,000, or 19.1%, from $1.6 million
in 2001 to $1.9 million in 2002, primarily due to the increase in technology
capital expenditures for our Beach operations. As a percentage of revenues,
depreciation remained relatively flat.
Goodwill Amortization. Upon the adoption of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see "New Accounting
Pronouncements").
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 - Beach
Revenues. Revenues increased $7.2 million, or 8.0%, from $90.3 million in
2000 to $97.5 million in 2001. Excluding other revenue from managed entities,
revenues increased $7.1 million, or 8.3%, from $85.3 million in 2000 to $92.4
million in 2001, primarily due to our 2000 and 2001 Beach acquisitions offset by
a 1.1% decrease in same-store gross lodging revenues driven by a 3.0 point
decrease in occupancy offset by a 4.4% increase in ADR.
Direct Operating Expenses. Direct operating expenses increased $2.8
million, or 6%, from $45.9 million in 2000 to $48.7 million in 2001, primarily
due to our 2000 and 2001 acquisitions. As a percentage of revenues, direct
operating expenses decreased 0.9 points due to increased operating efficiencies
and cost reduction initiatives.
General and Administrative Expenses. General and administrative expenses
increased $3.6 million, or 21%, from $17.7 million in 2000 to $21.3 million in
2001, primarily due to our 2000 and 2001 acquisitions. As a percentage of
revenues, general and administrative expenses remained relatively flat.
Other Expenses From Managed Entities. Other expenses from managed entities
increased $118,000, or 2.4%, from $4.9 million in 2000 to $5.1 million in 2001,
due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by the entities under our management (see "New Accounting
Pronouncements"). The reimbursements for these amounts are reflected in
revenues. As a percentage of revenues, other expenses from managed entities
decreased 0.3 points primarily due to an increase in revenues.
Depreciation. Depreciation increased $50,000, or 3%, from $1.58 million in
2000 to $1.63 million in 2001, primarily due to our 2000 and 2001 acquisitions.
As a percentage of revenues, depreciation remained relatively flat.
Goodwill Amortization. Goodwill amortization increased $554,000, or 21%,
from $2.6 million in 2000 to $3.2 million in 2001, primarily due to our 1999 and
2000 acquisitions. As a percentage of revenues, goodwill amortization remained
relatively flat.
Hawaii
The following table sets forth the condensed consolidated results of
operations for the years ended December 31, 2000, 2001 and 2002 for our Hawaiian
operations on the islands of Hawaii, Kauai, Maui and Oahu.
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Exhibit 13
(dollars in thousands) 2000 2001 2002
-------------- --------------- --------------
Revenues $51,683 100.0% $50,462 100.0% $52,951 100.0%
Direct operating expenses 9,387 18.2 8,492 16.8 7,507 14.2
General and administrative expenses 7,100 13.7 7,516 14.9 8,421 15.9
Other expenses from managed entities 25,636 49.6 26,215 51.9 29,503 55.7
------- ----- ------- ----- ------- -----
Operating income before depreciation
and amortization 9,560 18.5 8,239 16.2 7,520 14.2
Depreciation 472 0.9 495 1.0 373 0.7
Goodwill amortization 76 0.2 72 0.1 -- --
------- ----- ------- ----- ------- -----
Operating income $ 9,012 17.4% $ 7,672 15.2% $ 7,147 13.5%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 - Hawaii
Revenues. Revenues increased $2.5 million, or 4.9%, from $50.5 million in
2001 to $53.0 million in 2002. Excluding other revenue from managed entities,
revenues decreased $799,000, or 3.3%, from $24.2 million in 2001, to $23.4
million in 2002. This decline is primarily due to a 1.6% decrease in same-store
gross lodging revenues primarily due to a 7.1% decrease in ADR.
Direct Operating Expenses. Direct operating expenses decreased $985,000, or
11.6%, from $8.5 million in 2001 to $7.5 million in 2002, primarily due to cost
reduction initiatives. As a percentage of revenues, direct operating expenses
decreased 2.6 points due to increased operating efficiencies and cost reduction
initiatives.
General and Administrative Expenses. General and administrative expenses
increased $905,000, or 12.0%, from $7.5 million in 2001 to $8.4 million in 2002,
primarily due to an increase in professional fees related to a favorable
mediation settlement. As a percentage of revenues, general and administrative
expenses increased 1.0 point due to the increase in general and administrative
expenses.
Other Expenses From Managed Entities. Other expenses from managed entities
increased $3.3 million, or 12.5%, from $26.2 million in 2001 to $29.5 million in
2002, due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by the entities under our management (see "New Accounting
Pronouncements"). The reimbursements for these amounts are reflected in
revenues. As a percentage of revenues, other expenses from managed entities
increased 3.8 points primarily due to an increase in these expenses.
Depreciation. Depreciation decreased $122,000, or 24.6%, from $495,000 to
$373,000 primarily due to certain in-service assets being fully depreciated. As
a percentage of revenues, depreciation remained relatively flat.
Goodwill Amortization. Upon the adoption of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see "New Accounting
Pronouncements").
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 - Hawaii
Revenues. Revenues decreased $1.2 million, or 2.4%, from $51.7 million in
2000 to $50.5 million in 2001. Excluding other revenues from managed entities,
revenues decreased $1.8 million, or 7.0%, from $26.0 million in 2000 to $24.2
million in 2001, primarily due to a 7.8% decrease in same-store gross lodging
revenues driven by a 7.6 point decrease in occupancy.
Direct Operating Expenses. Direct operating expenses decreased $895,000, or
9.5%, from $9.4 million in 2000 to $8.5 million in 2001, primarily due to the
decrease in occupancy and cost reduction initiatives. As a percentage of
revenues, direct operating expenses decreased 1.4 points due to increased
operating efficiencies and cost reduction initiatives.
General and Administrative Expenses. General and administrative expenses
increased $416,000, or 5.9%, from $7.1 million in 2000 to $7.5 million in 2001,
primarily due to an increase in units under management and employee severance
charges related to fourth quarter 2001 lay-offs. As a percentage of revenues,
general and administrative expenses increased 1.2 points due to the severance
charges and decreased revenues.
Other Expenses From Managed Entities. Other expenses from managed entities
increased $579,000, or 2.3%, from $25.6 million in 2000 to $26.2 million in
2001, due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by the entities under our management (see "New Accounting
Pronouncements"). The reimbursements for these amounts are reflected in
revenues. As a percentage of revenues, other expenses from managed entities
increased 2.3 points primarily due to an increase in these expenses.
Depreciation. Depreciation increased $23,000, or 4.9%, from $472,000 in
2000 to $495,000 in 2001, primarily due to increased technology capital
expenditures. As a percentage of revenues, depreciation remained relatively
flat.
Goodwill Amortization. Goodwill amortization remained relatively flat in
2001 when compared to 2000. As a percentage of revenues, goodwill amortization
remained flat.
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Exhibit 13
Mountain
The following table sets forth the condensed consolidated results of
operations for the years ended December 31, 2000, 2001 and 2002 for our Mountain
operations in Whistler, British Columbia; Aspen, Breckenridge, Crested Butte,
Dillon, Keystone, Snowmass Village, Steamboat Springs and Telluride, Colorado;
Sun Valley, Idaho; Big Sky, Montana; Mt. Bachelor and Sunriver, Oregon;
Gatlinburg and Pigeon Forge, Tennessee; and The Canyons, Deer Valley, and Park
City, Utah.
(dollars in thousands) 2000 2001 2002
-------------- -------------- --------------
Revenues $34,391 100.0% $38,254 100.0% $35,526 100.0%
Direct operating expenses 21,568 62.7 23,026 60.2 23,077 65.0
General and administrative expenses 5,842 17.0 9,357 24.5 7,611 21.4
Other expenses from managed entities 664 1.9 719 1.8 779 2.2
------- ----- ------- ----- ------- -----
Operating income before depreciation
and amortization 6,317 18.4 5,152 13.5 4,059 11.4
Depreciation 742 2.2 1,129 3.0 1,001 2.8
Goodwill amortization 1,007 2.9 1,176 3.1 -- --
------- ----- ------- ----- ------- -----
Operating income $ 4,568 13.3% $ 2,847 7.4% $ 3,058 8.6%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 - Mountain
Revenues. Revenues decreased $2.7 million, or 7.1%, from $38.2 million in
2001 to $35.5 million in 2002. Excluding other revenue from managed entities,
revenues decreased $2.8 million, or 7.4%, from $37.5 million in 2001 to $34.7
million in 2002, primarily due to a $677,000 decrease in net real estate
commissions and a 3.0% decrease in same-store gross lodging revenues driven by a
1.7 point decline in occupancy.
Direct Operating Expenses. Direct operating expenses increased $51,000, or
0.2%, from $23.0 million in 2001 to $23.1 million in 2002, primarily due to an
increase in number of managed units. As a percentage of revenues, direct
operating expenses increased 4.8 points due to the increased number of units.
General and Administrative Expenses. General and administrative expenses
decreased $1.7 million, or 18.7%, from $9.4 million in 2001 to $7.6 million in
2002, primarily due to cost control initiatives. As a percentage of revenues,
general and administrative expenses decreased 3.1 points due to the cost control
initiatives.
Other Expenses From Managed Entities. Other expenses from managed entities
increased $60,000, or 8.3%, from $719,000 in 2001 to $779,000 in 2002, due to an
increase in payroll for managed entities. These expenses are reimbursed at our
cost by the entities under our management (see "New Accounting Pronouncements").
The reimbursements for these amounts are reflected in revenues. As a percentage
of revenues, other expenses from managed entities increased 0.4 points primarily
due to an increase in these expenses.
Depreciation. Depreciation decreased $128,000, or 11.3%, from $1.1 million
in 2001 to $1.0 million in 2002, primarily due to certain in-service assets
being fully depreciated. As a percentage of revenues, depreciation remained
relatively flat.
Goodwill Amortization. Upon the adoption of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see "New Accounting
Pronouncements").
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 - Mountain
Revenues. Revenues increased $3.9 million, or 11.2% from $34.4 million in
2000 to $38.3 million in 2001. Excluding other revenue from managed entities,
revenues increased $3.8 million, or 11.3%, from $33.7 million in 2000 to $37.5
million in 2001, primarily due to our March 2001 acquisition in Steamboat
Springs, Colorado, and our April 2001 acquisition in Pigeon Forge, Tennessee.
Excluding the impact of these acquisitions, revenues decreased $2.6 million, or
8%, due to a 44% decrease in real estate sales and a 3.2% decrease in same-store
gross lodging revenues driven by a 1.9 point decrease in occupancy and a 2.5%
decrease in ADR.
Direct Operating Expenses. Direct operating expenses increased $1.5
million, or 6.8%, from $21.6 million in 2000 to $23.0 million in 2001, primarily
due to our 2001 acquisitions. Excluding the impact of these acquisitions, direct
operating expenses decreased $1.4 million, or 7%, due to increased operating
efficiencies and cost reduction initiatives. As a percentage of revenues, direct
operating expenses decreased 2.5 points primarily due to increased operating
efficiencies.
General and Administrative Expenses. General and administrative expenses
increased $3.5 million, or 60.2%, from $5.8 million in 2000 to $9.4 million in
2001, primarily due to our 2000 and 2001 acquisitions. Excluding the impact of
these acquisitions, general and administrative expenses increased $1.7 million,
or 30%, due to increased units under management and employee severance charges
related to fourth quarter lay-offs. As a percentage of revenues, general and
administrative expenses increased 7.5 points due to the increase in units under
management and severance charges.
Other Expenses From Managed Entities. Other expenses from managed entities
increased $55,000, or 8.3%, from $664,000 in 2000 to $719,000 in 2001, due to an
increase in payroll for managed entities. These expenses are reimbursed at our
cost by the entities under our management (see "New Accounting Pronouncements").
The reimbursements for these amounts are reflected in revenues. As a percentage
of revenues, other expenses from managed entities remained relatively flat.
6
Exhibit 13
Depreciation. Depreciation increased $387,000, or 52.2% from $742,000 in
2000 to $1.1 million in 2001, primarily due to our 2001 acquisitions and
increased capital expenditures. As a percentage of revenues, depreciation
increased 0.8 points.
Goodwill Amortization. Goodwill amortization increased $169,000, or 16.8%,
from $1.0 million in 2000 to $1.2 million in 2001, primarily due to our 2001
acquisitions. As a percentage of revenues, goodwill amortization remained
relatively flat.
Desert
The following table sets forth the condensed consolidated results of
operations for the years ended December 31, 2000, 2001 and 2002 for our Desert
operations in Phoenix, Scottsdale and Tucson, Arizona; and Palm Desert,
California.
(dollars in thousands) 2000 2001 2002
------------- -------------- --------------
Revenues $3,444 100.0% $3,317 100.0% $2,666 100.0%
Direct operating expenses 1,586 46.0 1,605 48.4 1,632 61.2
General and administrative expenses 836 24.3 845 25.5 1,029 38.6
Other expenses from managed entities -- -- -- -- -- --
------ ----- ------ ----- ------ -----
Operating income before depreciation
and amortization 1,022 29.7 867 26.1 5 0.2
Depreciation 58 1.7 93 2.8 54 2.0
Goodwill amortization 185 5.4 216 6.5 -- --
------ ----- ------ ----- ------ -----
Operating income (loss) $ 779 22.6% $ 558 16.8% $ (49) (1.8)%
====== ===== ====== ===== ====== =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 - Desert
Revenues. Revenues decreased $651,000, or 19.6%, from $3.3 million in 2001
to $2.7 million in 2002, primarily due to a 21.9% decrease in gross lodging
revenues driven by an 18.6% decline in managed units and a 2.6 point decrease in
occupancy.
Direct Operating Expenses. Direct operating expenses increased $27,000, or
1.7%, from $1.6 million in 2001 to $1.6 million in 2002, primarily due to
increased marketing expenditures by our Arizona operations. As a percentage of
revenues, direct operating expenses increased 12.8 points due to the decrease in
revenues.
General and Administrative Expenses. General and administrative expenses
increased $184,000, or 21.8%, from $845,000 in 2001 to $1.0 million in 2002,
primarily due to increased payroll related to certain managerial changes and an
increase in insurance costs. As a percentage of revenues, general and
administrative expenses increased 13.1 points due to the increase in general and
administrative expenses and the decrease in lodging revenues.
Other Expenses From Managed Entities. These operations do not have any
arrangements with managed entities to pay on behalf and receive reimbursements
for any payroll related costs.
Depreciation. Depreciation decreased $39,000, or 41.9%, from $93,000 in
2001 to $54,000 in 2002, primarily due to certain in-service assets being fully
depreciated. As a percentage of revenues, depreciation decreased 0.8 points due
to the decrease in depreciation expense.
Goodwill Amortization. Upon the adoption of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see "New Accounting
Pronouncements").
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 - Desert
Revenues. Revenues decreased $127,000, or 3.7%, from $3.4 million in 2000
to $3.3 million in 2001, primarily due to an 8.4% decrease in same-store gross
lodging revenues driven by a 1.6 point decrease in occupancy and a 4.9% decrease
in ADR.
Direct Operating Expenses. Direct operating expenses remained relatively
flat in 2001 when compared to 2000. As a percentage of revenues, direct
operating expenses increased 2.4 points due to the decrease in revenues.
General and Administrative Expenses. General and administrative expenses
remained relatively flat in 2001 when compared to 2000. As a percentage of
revenues, general and administrative expenses increased 1.2 points due to the
decrease in revenues.
Other Expenses From Managed Entities. These operations do not have any
arrangements with managed entities to pay on behalf and receive reimbursements
for any payroll related costs.
Depreciation. Depreciation increased $35,000, or 60.3%, from $58,000 in
2000 to $93,000 in 2001, primarily due to increased capital expenditures. As a
percentage of revenues, depreciation increased 1.1 points due to the increased
capital expenditures and the decrease in revenues.
Goodwill Amortization. Goodwill amortization increased $31,000, or 16.8%,
from $185,000 in 2000 to $216,000 in 2001, primarily due to the full-year
amortization of an earn-up payment made during 2000. As a percentage of
revenues, goodwill amortization increased 1.1 points primarily due to the
earn-up payment made during 2000.
7
Exhibit 13
Other
The following table sets forth the consolidated condensed results of
operations for the years ended December 31, 2000, 2001 and 2002 for our Other
operations comprised of ResortQuest Technologies and corporate.
(dollars in thousands) 2000 2001 2002
---------------- ----------------- ------------------
Revenues $ 3,478 100.0% $ 3,429 100.0% $ 3,146 100.0%
Direct operating expenses 1,860 53.5 2,002 58.4 2,100 66.8
General and administrative expenses 9,504 N/M 18,616 N/M 29,742 N/M
Other expenses from managed entities -- -- -- -- -- --
------- ----- -------- ----- -------- -----
Operating loss before depreciation
and amortization (7,886) N/M (17,189) N/M (28,696) N/M
Depreciation 696 20.0 1,859 54.2 3,092 98.3
Goodwill amortization 1,033 29.7 1,020 29.7 -- --
------- ----- -------- ----- -------- -----
Operating loss $(9,615) N/M $(20,068) N/M $(31,788) N/M
======= ===== ======== ===== ======== =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 - Other
Revenues. Revenues decreased $283,000, or 8.3%, from $3.4 million in 2001
to $3.1 million in 2002, primarily due to a decline in software sales and
maintenance fees.
Direct Operating Expenses. Direct operating expenses increased $98,000, or
4.9%, from $2.0 million in 2001 to $2.1 million in 2002, primarily due to
increased costs associated with our software operations. As a percentage of
revenues, direct operating expenses increased 8.4 points primarily due to the
decline in revenues.
General and Administrative Expenses. General and administrative expenses
increased $11.1 million, or 59.8%, from $18.6 million in 2001 to $29.7 million
in 2002, primarily due to the $15.1 million of unusual items and other charges
recorded in 2002. Excluding the impact of these 2002 charges and the $4.4
million in unusual items and other charges recorded in 2001, general and
administrative expenses increased $438,000, or 3.1%, due to increased insurance
costs and increased marketing expenditures. The unusual items and other charges
recorded during the year relate to a non-cash write-down of $10.6 million of
certain capitalized software development costs and intangibles related to the
Company's vacation rental management software, First Resort Software, severance
and employee-related charges of approximately $2.6 million, approximately $1.1
million in professional fees and expenses related to a study to explore
financing and strategic growth alternatives and an offer to acquire the Company
that was determined by the Board, after appropriate review, not to be in the
best interests of the Company and its shareholders, and approximately $760,000
of other charges related to property and office closings and consolidations. The
$10.6 million write-down relates to the Company's change in strategy that
included a redefinition of its target market for First Resort Software. Prior to
this strategy shift, the latest version of First Resort Software was being
designed to meet the needs of essentially all companies in our industry. The new
strategy is to focus on the needs of small to medium-sized property management
companies, which make up the majority of the industry. This change necessitated
a write-down of certain capitalized development costs and intangibles related to
the software as recorded on the Company's balance sheet. The severance and
employee-related charges primarily relate to the fourth quarter senior
management changes and the majority of these costs will be paid out over the
next several years. The property and office closings include the closing of
Shoreline Properties in Ohio and the consolidation and closings of offices in
Dillon, Lafayette, and Basalt, Colorado; Memphis, Tennessee; and Hilton Head,
South Carolina. The Company will realize significant payroll and lease expense
savings through these consolidations.
Other Expenses From Managed Entities. These operations do not have any
arrangements with managed entities to pay on behalf and receive reimbursements
for any payroll related costs.
Depreciation. Depreciation increased $1.2 million, or 66.3%, from $1.9
million in 2001 to $3.1 million in 2002, primarily due to increased technology
capital expenditures related to enhancements to our web site and the release of
the new version of First Resort Software. As a percentage of revenues,
depreciation increased 44.1 points primarily due to the increase in technology
capital expenditures.
Goodwill Amortization. Upon the adoption of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see "New Accounting
Pronouncements").
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 - Other
Revenues. Revenues remained relatively flat in 2001 when compared to 2000.
Direct Operating Expenses. Direct operating expenses increased $142,000, or
7.6%, from $1.9 million in 2000 to $2.0 million in 2001, primarily due to
increased labor costs within ResortQuest Technologies. As a percentage of
revenues, direct operating expenses increased 4.9 points primarily due to these
increased labor costs.
General and Administrative Expenses. General and administrative expenses
increased $9.1 million, or 95.8%, from $9.5 million in 2000 to $18.6 million in
2001, primarily due to the $4.4 million of unusual items and other charges
recorded by corporate in 2001. Excluding the impact of these charges, general
and administrative expenses increased $4.7 million, or
8
Exhibit 13
50%, due to increased insurance costs, increased marketing expenditures and the
opening of a technology office and a regional accounting office during 2001.
These charges primarily represent a non-cash write-down of certain previously
released First Resort Software versions, deferred costs for acquisition
candidates that will no longer be pursued, one-time legal charges and a
severance accrual.
Other Expenses From Managed Entities. These operations do not have any
arrangements with managed entities to pay on behalf and receive reimbursements
for any payroll related costs.
Depreciation. Depreciation increased $1.2 million, or 167%, from $696,000
in 2000 to $1.9 million in 2001, primarily due to increased technology capital
expenditures related to enhancements to our web site, upgrades to our First
Resort Software products sold through ResortQuest Technologies and the
implementation of our new financial management technology platform. As a
percentage of revenues, depreciation increased 34.2 points primarily due to
these investments in technology.
Goodwill Amortization. Goodwill amortization remained relatively flat in
2001 when compared to 2000. As a percentage of revenues, goodwill amortization
remained flat.
Liquidity and Capital Resources
Overview
ResortQuest is a holding company that conducts all of its operations
through its subsidiaries operating in over 50 premier resort locations.
Accordingly, the primary internal source of our liquidity is through the cash
flows realized from our subsidiaries and our long-term borrowings. We utilize a
consolidated daily cash management system that allows us to fully utilize all
unrestricted cash to repay outstanding debt in order to reduce our net interest
expense.
We generated cash flows from operating activities of $14.7 million in 2002,
primarily due to the decrease in cash held in escrow and the decrease in trade
and other receivables. Cash used in investing activities was approximately $10.3
million in 2002 due to the $3.0 million in net acquisition costs related to
certain 2001 acquisitions and $7.3 million in purchases of property, equipment
and software. The majority of these costs represent our continued investment in
the new release of our First Resort Software product launched in July 2002. Cash
used in financing activities totaled $3.8 million in 2002, primarily related to
$3.6 million in net repayments on our revolving Credit Facility.
At December 31, 2002, we had $859,000 in Cash and cash equivalents and
$15.5 million in Cash held in escrow. Cash held in escrow is released at varying
times in accordance with state regulations, generally based upon the guest stay
or, in the case of real estate sales deposits, when the property is sold. At
December 31, 2002, we had a working capital deficit of $36.4 million; however,
we have up to $13.2 million, subject to certain restrictions, available under
our Credit Facility at December 31, 2002. During 2000 we implemented a
consolidated daily cash management system that allows us to fully utilize all
unrestricted cash to keep our debt paid down in order to reduce our net interest
expense. We anticipate that our cash flows from operations will provide cash in
excess of our normal working capital needs, debt service requirements and
planned capital expenditures over the next year. However, future acquisitions
and/or other initiatives, depending on their size and the method of financing,
may affect our liquidity and capital requirements during that time.
Total capital expenditures for 2003 are currently anticipated to be $6.0
million of which approximately $2.5 million is expected to be used for software
development, systems integration and other technology initiatives, with the
balance being applied to building renovations, vehicles, furniture, fixtures and
equipment.
Long-Term Debt
On January 22, 2001, we replaced our existing Credit Facility that was to
expire on May 26, 2001 with a similar facility that expires on January 22, 2004.
Due to the events of September 11th, on October 30, 2001, we amended the Credit
Facility to modify the restrictive covenants to allow more flexibility for us
under this debt agreement through the end of 2002. The amendment also allowed
for up to a 100 basis point increase to our interest rate based on certain
financial ratios. Subject to certain limitations, the Credit Facility may be
used to borrow up to $40 million for capital expenditures and for general
corporate purposes. Available borrowings are reduced by open letters of credit.
The credit agreement requires us to comply with various loan covenants, which
include maintenance of certain financial ratios, restrictions on additional
indebtedness and restrictions on liens, guarantees, advances, capital
expenditures, sale of assets and dividends. Interest on outstanding balances of
the Credit Facility is computed at our election, on the basis of either the
Prime Rate or the Eurodollar Rate, as defined, plus a margin of 2.0% up to 3.0%
based on the amendment discussed above. At December 31, 2002, the weighted
average interest rate on the $25.0 million in outstanding indebtedness was
4.57%. Availability fees are 0.5% per annum and are payable on the unused
portion of the Credit Facility. Interest and availability fees are payable
monthly.
On June 16, 1999, we issued $50 million of Senior Notes, due June 2004, in
connection with a note purchase agreement. On October 30, 2001, we also amended
the Senior Notes to modify the restrictive covenants through the end of 2002 to
allow more flexibility for us under this debt agreement. The amendment also
allowed for up to a 100 basis point increase to our interest rate based on
certain financial ratios. At December 31, 2002, the interest rate on the Senior
Notes was 10.06%. The note purchase agreement contains loan covenants
substantially similar to those of the credit agreement under the Credit Facility
and has prepayment restrictions. Interest is payable quarterly.
The Credit Facility is secured pari passu to the Senior Notes by
substantially all of our assets, including the stock of our significant
subsidiaries, as defined. Due to the unusual items and other charges recorded
during the fourth quarter of 2002, we were not in compliance with certain
covenants related to our Credit Facility and Senior Notes. During March 2003 we
9
Exhibit 13
finalized an amendment to our borrowing agreements to bring us into compliance
which required us to pay a 1.4% amendment fee approximating $1.3 million. The
amendment will allow more flexibility for us under the debt agreement through
the end of 2003. Management is currently in discussions to refinance all
outstanding borrowings during 2003. There is no assurance that we will be able
to refinance these borrowings and significant changes to the current terms, such
as interest rates and restrictive covenants, may result from any refinancing.
10
Exhibit 13
Contractual Obligations
The following table summarizes the Company's contractual obligations as of
December 31, 2002 (in thousands):
Payments Due by Period
-------------------------------------------------------------------
Contractual Obligation Total 2003 2004 2005 2006 2007 Thereafter
-------- ------ ------- ------ ------ ------ ----------
Senior Notes $ 50,000 $ -- $50,000 $ -- $ -- $ -- $ --
Credit Facility 25,045 -- 25,045 -- -- -- --
Operating Leases 41,183 7,465 6,271 5,756 4,876 3,404 13,411
Letters of Credit 1,612 1,612 -- -- -- -- --
Capital lease obligations 79 79 -- -- -- -- --
Miscellaneous debt 15 15 -- -- -- -- --
-------- ------ ------- ------ ------ ------ -------
Total contractual cash obligations $117,934 $9,171 $81,316 $5,756 $4,876 $3,404 $13,411
======== ====== ======= ====== ====== ====== =======
Registration and Equity Offerings
We have registered 8.0 million shares of common stock through various shelf
registration statement filings. As of December 31, 2002, we had issued 3,289,487
shares under these shelf registration statements in connection with
acquisitions, with the remaining 4,710,513 shares available for future
acquisitions.
Acquisition Strategy
Although our strategy for 2003 is to focus on internal growth, we intend to
continue to pursue selected acquisition opportunities in strategic and existing
markets. There can be no assurance that we will be able to identify, acquire or
profitably manage additional businesses or successfully integrate acquired
businesses into our operations without substantial costs, delays or other
operational or financial problems. Increased competition for acquisition
candidates may develop, in which event there may be fewer acquisition
opportunities available to us, as well as higher acquisition prices.
Furthermore, acquisitions involve a number of unique risks, including the
failure of acquired companies to achieve anticipated results, diversion of
management's attention, failure to retain key personnel, risks associated with
unanticipated events or liabilities and amortization of certain acquired
intangible assets. Some or all of these could have a material adverse effect on
our business, financial condition and results of operations.
Since January 1, 2001, we have completed the following significant
acquisitions: Florida Vacation Accommodations, Inc. in Naples, Longboat Key and
Sarasota, Florida, effective January 1, 2001; Steamboat Premier Properties, Ltd.
in Steamboat Springs, Colorado, effective January 1, 2001; R&R Resort Rental
Properties, Inc. in the Outer Banks of North Carolina, effective March 31, 2001;
Mountain Valley Properties, Inc. in Gatlinburg and Pigeon Forge, Tennessee,
effective April 1, 2001; and Universal Vacations, Inc. in Bradenton and New Port
Richey, Florida, effective May 1, 2001. These acquisitions were accounted for
under the purchase method of accounting.
The timing, size or success of any acquisition effort and the associated
potential capital commitments are unpredictable. We expect to fund future
acquisitions primarily through a combination of cash flows from operations,
borrowings under our Credit Facility, other debt fundings and the issuance of
common stock. Our ability to fund future acquisitions through borrowings under
the Credit Facility may be limited by certain restrictive covenants of the
facility, the satisfaction of which may be dependent upon our ability to raise
additional equity through either offerings for cash or the issuance of stock as
consideration for acquisitions.
Non-compete and Employment Agreements
We have entered into non-compete agreements with many of the former owners
of the companies that now comprise ResortQuest. These non-compete agreements are
generally one to five years in length effective the day the operations are
merged with ResortQuest. Additionally, we have entered into employment
agreements with certain of these former owners, all senior corporate officers
and certain key employees. Among other things, these agreements allow for
severance payments and some include acceleration of stock option awards upon a
change in control of ResortQuest, as defined under the agreements. At December
31, 2002, the maximum amount that would be payable under all agreements if a
change in control occurred without prior written notice would be approximately
$10.8 million.
Seasonality and Quarterly Fluctuations
Our business is highly seasonal. Our results of operations are subject to
quarterly fluctuations caused primarily by the seasonal variations in the
vacation rental and property management industry, with peak seasons dependent on
whether the resort is primarily a summer, winter or year round destination. Our
quarterly results of operations may also be subject to fluctuations as a result
of the timing and cost of acquisitions, the timing of real estate sales, changes
in relationships with travel providers, extreme weather conditions or other
factors affecting leisure travel and the vacation rental and property management
industry.
11
Exhibit 13
Quantitative and Qualitative Disclosures about Market Risk
We do not have significant market risk with respect to interest rates,
foreign currency exchanges or other market rate or price risks, and we do not
hold any financial instruments for trading purposes. At December 31, 2001, $28.6
million of our long-term borrowings accrue interest at variable interest rates.
Based on this debt level annual interest expense would increase by approximately
$132,000, if interest rates were to increase by 46 basis points, or 10%, over
the current weighted average interest rate of these variable rate borrowings. At
December 31, 2002, $25.0 million of our long-term borrowings accrue interest at
variable interest rates. Based on this debt level annual interest expense would
increase by approximately $114,000, if interest rates were to increase by 46
basis points, or 10%, over the current weighted average interest rate of these
variable rate borrowings.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. We continually evaluate our estimates and
assumptions, including those related to bad debts, trade and other receivables,
valuation of property, equipment and software, goodwill, self-insurance
reserves, and contingencies and litigation. Our estimates and assumptions are
based on historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying amounts of assets and liabilities that are
not readily apparent from other sources. We believe the following critical
accounting policies affect our more significant estimates and assumptions used
in preparing our consolidated financial statements. Actual results could differ
from our estimates.
Trade and other receivables are reflected net of an estimated allowance for
doubtful accounts. This estimate is based primarily on historical experience and
assumptions with respect to future payment trends.
Property, equipment and software are stated at cost, or in the case of
equipment acquired under capital lease, the present value of future lease
payments, less accumulated depreciation. Certain costs for developing,
customizing and installing software for internal use and for sale to third
parties are capitalized. Revenues related to the sale of software to third
parties are recognized when the systems are installed. Depreciation is computed
using the straight-line method over the estimated useful lives of the recorded
assets or the lease terms. We periodically, or upon the occurrence of certain
events, review the balances of these long-lived assets for possible impairment.
The assessment of long-lived assets for impairment requires us to make certain
judgments, including the estimate of cash flows from the respective assets.
In accordance with Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," as of January 1, 2002, the goodwill
balance recorded by the Company is no longer being amortized, but is reviewed
annually, and upon the occurrence of certain events, for impairment. The
calculation of an impairment charge requires us to make estimates of future cash
flows with respect to the identified net assets acquired. The initial adoption
impairment charge recorded on January 1, 2002 related to the goodwill associated
with our Desert operations and the impairment charge recorded on December 1,
2002 related to the goodwill associated with our software operations. Prior to
January 1, 2002, goodwill had been amortized on a straight-line basis over 40
years, other than that associated with the acquisition of First Resort Software,
Inc., which had been amortized over 15 years.
We are self-insured for various levels of workers' compensation and
employee medical and dental insurance coverage. Insurance reserves include the
present values of projected settlements for claims. Projected settlements are
estimated based on historical trends and actuarial data.
We are involved with various legal actions arising in the course of our
business. Legal reserves are established for actions in which the outcomes of
the cases are probable and monetary damages are reasonably estimable as
determined by in-house and external legal counsel. We do not believe that any of
the known actions will have a material adverse effect on our business, financial
condition or results of operations.
Revenues are primarily derived through property management fees, service
fees and real estate commissions. Property management fees and service fees are
recognized as services are provided. Real estate commissions are recognized for
real estate brokerage commissions at time of closing, net of agent commissions.
New Accounting Pronouncements
During the quarter ended March 31, 2002, we changed our method of
accounting for reimbursable costs to conform to the Financial Accounting
Standards Board's Emerging Issues Task Force Consensus No. 01-14, "Income
Statement Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred" ("EITF No. 01-14"), effective for us on January 1, 2002. As a
result, certain reimbursements received are recorded as revenue and the costs
incurred on behalf of managed associations and properties are recorded as
expenses. These costs, which relate primarily to payroll costs at managed
properties and associations where we are the employer, are reflected in other
revenue and expenses from managed entities in the consolidated Statements of
Operations. Revenues and expenses for the prior periods have been reclassified
to conform with the current year presentation. As the reimbursements are made
based upon the costs incurred with no added margin resulting in the expenses and
related revenues being identical, the adoption of EITF No. 01-14 did not have
any effect on our operating income, total or per share net income, cash flows or
financial position.
12
Exhibit 13
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 eliminated
the pooling-of-interests method of accounting for business combinations and
requires all transactions initiated after June 30, 2001, to be accounted for
using the purchase method. Under Statement No. 142, goodwill related to our
future acquisitions is not subject to amortization, and goodwill related to our
historical acquisitions is no longer amortized as of January 1, 2002. Goodwill
is subject to reviews for impairment annually and upon the occurrence of certain
events, and if impaired, a write-down will be recorded. Upon our adoption of
Statement No. 142, our software operations and each of our geographical resort
regions with assigned goodwill were each valued as a reporting unit. If the fair
value of the reporting unit was greater than the book value, including assigned
goodwill, no further testing was required. However, if the book value, including
goodwill, was greater than the fair value of the reporting unit, the assets and
liabilities of the reporting unit and the fair value of the assets is the
implied fair value of goodwill. To the extent that the implied fair value of
goodwill was less than the book value of goodwill, an impairment charge was
recognized as a cumulative effect of a change in accounting principle. Based on
this test, we recorded a non-cash $8.1 million write-down of our goodwill
related to our Desert resort operations, partially off-set by a $1.9 million
income tax benefit. The Desert resort operations are expected to continue to
experience declining cash flows as a result of the economics of the Desert
markets. During December 2002, management made changes to its software
operations strategy that included a redefinition of its target market for First
Resort Software. This change necessitated a $4.2 million write-down of our
goodwill related to the software operations and a $6.4 million write-down of
certain capitalized software development costs. As these write-downs were
recorded after the initial adoption of Statement No. 142, a $10.6 million
non-cash charge is reflected in general and administrative expenses in our 2002
consolidated income statement. First Resort is the leading property management
software for the industry with over 20% market share, and we will continue to
market the software to small and medium-sized property management companies,
which make up the majority of the industry.
We have completed the process of evaluating the impact of Statement No.
143, "Accounting for Asset Retirement Obligations," and we do not expect this
statement to have a material impact on our financial position or results of
operations upon its adoption in 2003.
Effective January 1, 2002 we adopted Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets;" the adoption of this statement did
not have a material impact to our financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement provides for the rescissions or amendment of
certain previously issued accounting standards. The various provisions of this
standard are effective for either 2002 or 2003. Also during the quarter ended
June 30, 2002, Statement No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued and is effective for activities initiated after
December 31, 2002. We do not expect Statement No. 145 or No. 146 to have a
material impact on our financial position or results of operations upon their
adoption in 2003.
In October 2002, the FASB issued Statement No. 147 "Acquisitions of Certain
Financial Institutions," which applies to all acquisitions of financial
institutions except those between two or more mutual enterprises. Statement No.
147 has no impact on our financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure - an Amendment of FASB
Statement No. 123," to provide alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. Statement No. 148 also requires disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of Statement No. 148 are
effective for fiscal years ending after December 15, 2002, and the disclosure
provisions have been applied in our 2002 financial statements. We will implement
the interim disclosure provisions in first quarter 2003 and will continue to
account for stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on existing
disclosure requirements for most guarantees including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues a
guarantee, the Company must recognize an additional liability for the fair value
or market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and initial measurement provisions apply on a prospective
basis to guarantees issued or modified after December 31, 2002, the disclosure
requirements in the interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company has fully
implemented the disclosure requirements of FIN 45 and will adopt the additional
provisions for any qualifying transactions entered into after December 31, 2002.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN 46 addresses consolidation by business enterprises where
equity investors do not bear the residual economic risks and rewards. These
entities have been commonly referred to as "special purpose entities." Companies
are required to apply the provision of FIN 46 prospectively for all variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. All
interests acquired before February 1, 2003 must follow the new rules in
accounting periods beginning after June 15, 2003. FIN 46 is expected to have no
impact on our consolidated results of operations or financial position.
13
Exhibit 13
Performance Statistics
ResortQuest International, Inc.
Performance Statistics
Total System (2)
Three Months Ended Twelve Months Ended
Dec 31, Dec 31, Dec 31, Dec 31,
2001 2002 VAR 2001 2002 VAR
------- ------- ----- -------- -------- -----
Beach
Gross Lodging Revenues(1) $15,490 $14,399 (7.0)% $210,788 $195,095 (7.4)%
Occupancy 24.1% 23.8% (0.3)pts 46.2% 45.3% (0.4)pts
ADR $ 87.61 $ 89.39 2.0% $ 155.77 $ 154.67 (0.7)%
RevPAU $ 21.10 $ 21.25 0.7% $ 72.00 $ 70.81 (1.7)%
Total Units 9,460 9,435 (0.3)% 9,460 9,435 (0.3)%
Hawaii
Gross Lodging Revenues(1) $26,711 $33,090 23.9% $143,384 $141,104 (1.6)%
Occupancy 61.9% 69.7% 7.8 pts 71.7% 71.8% 0.1 pts
ADR $104.73 $102.65 (2.0)% $ 115.20 $ 107.00 (7.1)%
RevPAU $ 64.85 $ 71.56 10.3% $ 82.57 $ 76.79 (7.0)%
Total Units 5,553 5,468 (1.5)% 5,553 5,468 (1.5)%
Mountain
Gross Lodging Revenues(1) $ 9,383 $ 9,904 5.6% $ 58,792 $ 57,151 (2.8)%
Occupancy 19.5% 18.7% (0.8)pts 33.2% 31.1% (2.1)pts
ADR $186.01 $202.49 8.9% $ 175.61 $ 181.92 3.6%
RevPAU $ 36.29 $ 37.77 4.1% $ 58.29 $ 56.52 (3.0)%
Total Units 3,283 3,311 0.9% 3,283 3,311 0.9%
Desert
Gross Lodging Revenues(1) $ 1,340 $ 1,085 (19.0)% $ 8,092 $ 6,322 (21.9)%
Occupancy 38.4% 33.0% (5.4)pts 42.4% 39.8% (2.6)pts
ADR $ 84.49 $ 97.63 15.6% $ 105.12 $ 108.89 3.6%
RevPAU $ 32.45 $ 32.25 (0.6)% $ 44.54 $ 43.35 (2.7)%
Total Units 522 425 (18.6)% 522 425 (18.6)%
Total
Gross Lodging Revenues(1) $52,924 $58,478 10.5% $421,057 $399,672 (5.1)%
Occupancy 34.5% 37.9% 3.4 pts 51.4% 51.3% (0.1)pts
ADR $106.24 $107.60 1.3% $ 139.90 $ 135.37 (3.2)%
RevPAU $ 36.61 $ 40.73 11.3% $ 71.92 $ 69.51 (3.4)%
Total Units 18,818 18,639 (1.0)% 18,818 18,639 (1.0)%
(1) Gross lodging revenues are in thousands and represent the total rental
charged to property rental customers. Our revenue represents from 3% to
over 40% of the gross lodging revenues based on the services provided by
us.
(2) Total system statistics include all exclusive management contracts from the
period under management through December 31, 2001 and December 31, 2002.
Excluded from these statistics are non-exclusive management contracts which
approximated 1,400 units as of December 31, 2001 and 1,500 as of December
31, 2002. Also excluded from these statistics are owner use nights and
renovation nights which were approximately 17.6% of gross available nights
in the three months ended December 31, 2001, and 15.6% of gross available
nights in the three months ended December 31, 2002, 14.3% of gross
available nights in the twelve months ended December 31, 2001, and 14.0% of
gross available nights in the twelve months ended December 31, 2002.
14
Exhibit 13
ResortQuest International, Inc.
Performance Statistics
Same-Store (2)
Three Months Ended Twelve Months Ended
Dec 31, Dec 31, Dec 31, Dec 31,
2001 2002 VAR 2001 2002 VAR
------- ------- ----- -------- -------- -----
Beach
Gross Lodging Revenues(1) $15,490 $14,399 (7.0)% $160,388 $153,288 (4.4)%
Occupancy 24.1% 23.8% (0.3)pts 46.9% 46.5% (0.4)pts
ADR $ 87.61 $ 89.39 2.0% $ 134.93 $ 134.65 (0.2)%
RevPAU $ 21.10 $ 21.25 0.7% $ 63.31 $ 62.64 (1.1)%
Total Units 9,460 9,435 (0.3)% 8,087 8,279 2.4%
Hawaii
Gross Lodging Revenues(1) $26,711 $33,090 23.9% $143,384 $141,104 (1.6)%
Occupancy 61.9% 69.7% 7.8 pts 71.7% 71.8% 0.1 pts
ADR $104.73 $102.65 (2.0)% $ 115.20 $ 107.00 (7.1)%
RevPAU $ 64.85 $ 71.56 10.3% $ 82.57 $ 76.79 (7.0)%
Total Units 5,553 5,468 (1.5)% 5,553 5,468 (1.5)%
Mountain
Gross Lodging Revenues(1) $ 9,383 $ 9,904 5.6% $ 54,642 $ 52,979 (3.0)%
Occupancy 19.5% 18.7% (0.8)pts 31.9% 30.2% (1.7)pts
ADR $186.01 $202.49 8.9% $ 178.53 $ 185.25 3.8%
RevPAU $ 36.29 $ 37.77 4.1% $ 56.96 $ 55.87 (1.9)%
Total Units 3,283 3,311 0.9% 3,102 3,131 0.9%
Desert
Gross Lodging Revenues(1) $ 1,340 $ 1,085 (19.0)% $ 8,092 $ 6,322 (21.9)%
Occupancy 38.4% 33.0% (5.4)pts 42.4% 39.8% (2.6)pts
ADR $ 84.49 $ 97.63 15.6% $ 105.12 $ 108.89 3.6%
RevPAU $ 32.45 $ 32.25 (0.6)% $ 44.54 $ 43.35 (2.7)%
Total Units 522 425 (18.6)% 522 425 (18.6)%
Total
Gross Lodging Revenues(1) $52,924 $58,478 10.5% $366,506 $353,693 (3.5)%
Occupancy 34.5% 37.9% 3.4 pts 52.1% 52.1% 0.0 pts
ADR $106.24 $107.60 1.3% $ 130.13 $ 126.26 (3.0)%
RevPAU $ 36.61 $ 40.73 11.3% $ 67.74 $ 65.76 (2.9)%
Total Units 18,818 18,639 (1.0)% 17,264 17,303 0.2%
(1) Gross lodging revenues are in thousands and represent the total rental
charged to property rental customers. Our revenue represents from 3% to
over 40% of the gross lodging revenues based on the services provided by
us.
(2) For better comparability, the three months ended December 31 statistics
exclude all non-exclusive management contracts, which approximated 1,500
units as of December 31, 2002. The twelve months ended December 31 excluded
all non-exclusive management contracts as well as properties that were not
acquired by ResortQuest prior to the fourth quarter of 2001, which
approximated 1,500 units as of December 31, 2002. Also excluded from these
statistics are owner use nights and renovation nights which were
approximately 17.6% of gross available nights in the three months ended
December 31, 2001, and 15.6% of gross available nights in the three months
ended December 31, 2002, 13.4% of gross available nights in the twelve
months ended December 31, 2001, and 13.3% of gross available nights in the
twelve months ended December 31, 2002.
15
Exhibit 13
Markets
We currently offer management services to rental properties in over 50
resort locations throughout the U.S. and in Canada. The following table sets
forth the aggregate number of properties managed in each of the following states
and provinces at December 31, 2002.
BEACH RESORTS
Florida: Anna Maria Island, Beaches of South Walton, Bonita Springs, Bradenton,
Captiva Island, Destin, Fort Myers, Fort Myers Beach, Ft. Walton Beach, Lido
Key, Longboat Key, Marco Island, Naples, Navarre Beach, New Port Richey,
Okaloosa Island, Orlando, Panama City, Pensacola, Perdido Key, Sanibel Island,
Sarasota, Siesta Key, Vanderbilt Beach and Venice. 6,296
Massachusetts: Nantucket 1,200
South Carolina: Hilton Head Island 611
Delaware: Bethany Beach 640
North Carolina: Outer Banks 991
Georgia: St. Simons Island 504
Alabama: Gulf Shores 315
HAWAII RESORTS
Hawaii: Hawaii, Kauai, Maui and Oahu 5,468
MOUNTAIN RESORTS
Colorado: Aspen, Breckenridge, Crested Butte, Dillon, Keystone,
Snowmass Village, Steamboat Springs and Telluride 1,900
British Columbia: Whistler 601
Utah: The Canyons, Deer Valley and Park City 368
Montana: Big Sky 212
Oregon: Mt. Bachelor and Sunriver 143
Idaho: Sun Valley 238
Tennessee: Gatlinburg and Pigeon Forge 180
DESERT RESORTS
California: Palm Desert 174
Arizona: Phoenix, Scottsdale and Tucson 251
------
TOTAL 20,092
======
Risks Associated With Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, including but not
limited to the risks associated with: successful integration of acquisitions,
factors affecting internal growth and management of growth, our acquisition
strategy and availability of financing, the travel and tourism industry,
seasonality, quarterly fluctuations and general economic conditions, and our
dependence on technology, e-commerce and travel providers. Important factors
that could cause actual results to differ materially include, but are not
limited to, those listed in our previous filings with the Securities and
Exchange Commission.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and, therefore, there can be no assurance that the forward-looking
statements included in this filing will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that the objectives and plans will be
achieved. We undertake no obligation to update forward looking statements,
whether as a result of new information, future events or otherwise.
16
Exhibit 13
Other Risks
We could not obtain permission of Arthur Andersen LLP to the inclusion in
this Annual Report and on Form 10-K of their Independent Auditors Report.
Accordingly, the Arthur Andersen LLP Independent Auditors Report herein is
merely reproduced from ResortQuest International, Inc.'s Annual Report and Form
10-K for the year ended December 31, 2001 (although the consolidated balance
sheet as of December 31, 2000 and the consolidated statements of operations,
changes in stockholders' equity, and cash flows for the year ended December 31,
1999 referred to in that report are not included herein) and does not include
the manual signature of Arthur Andersen LLP. The conviction of our former
independent auditors, Arthur Andersen LLP, on federal obstruction of justice
charges may adversely affect Arthur Andersen LLP's ability to satisfy any claims
arising from the provision of auditing services to us and may impede our access
to the capital markets.
17
Exhibit 13
RESORTQUEST INTERNATIONAL,INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
(in thousands, except share amounts) 2001 2002
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 213 $ 859
Cash held in escrow 22,648 15,468
Trade and other receivables, net 10,541 5,841
Deferred income taxes 1,430 724
Other current assets 6,063 4,807
-------- --------
Total current assets 40,895 27,699
-------- --------
Goodwill, net 216,534 205,830
Property, equipment and software, net 39,509 34,100
Other assets 7,336 5,924
-------- --------
Total assets $304,274 $273,553
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 322 $ 94
Deferred revenue and property owner payables 52,457 47,402
Accounts payable and accrued liabilities 14,298 14,628
Other current liabilities 3,069 2,024
-------- --------
Total current liabilities 70,146 64,148
-------- --------
Long-term debt, net of current maturities 78,644 75,045
Deferred income taxes 9,459 2,869
Other long-term obligations 6,111 5,007
-------- --------
Total liabilities 164,360 147,069
-------- --------
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value, 50,000,000
shares authorized, 19,243,249 and 19,251,749
shares outstanding, respectively 192 193
Additional paid-in capital 153,884 153,933
Accumulated other comprehensive loss (64) (60)
Excess distributions (29,500) (29,500)
Retained earnings 15,402 1,918
-------- --------
Total stockholders' equity 139,914 126,484
-------- --------
Total liabilities and stockholders' equity $304,274 $273,553
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
18
Exhibit 13
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(in thousands, except per share amounts) 2000 2001 2002
-------- -------- --------
Revenues
Property management fees $ 78,543 $ 88,732 $ 83,668
Service fees 47,080 47,889 44,685
Real estate and other 26,391 24,335 25,384
-------- -------- --------
152,014 160,956 153,737
Other revenue from managed entities 31,247 31,999 36,504
-------- -------- --------
Total revenues 183,261 192,955 190,241
-------- -------- --------
Operating expenses
Direct operating 80,314 83,838 83,607
General and administrative 40,940 57,663 66,484
Depreciation 3,549 5,209 6,465
Goodwill amortization 4,934 5,670 --
-------- -------- --------
129,737 152,380 156,556
Other expenses from managed entities 31,247 31,999 36,504
-------- -------- --------
Total expenses 160,984 184,379 193,060
-------- -------- --------
Operating income (loss) 22,277 8,576 (2,819)
Interest and other expense, net 4,814 4,647 6,233
-------- -------- --------
Income (loss) before income taxes 17,463 3,929 (9,052)
Provision for income taxes 7,857 2,328 (1,848)
-------- -------- --------
Income (loss) before the cumulative effect
of a change in accounting principle 9,606 1,601 (7,204)
Cumulative effect of a change in accounting principle,
net of a $1.9 million income tax benefit -- -- (6,280)
-------- -------- --------
Net income (loss) $ 9,606 $ 1,601 $(13,484)
======== ======== ========
Earnings (loss) per share
Basic
Before a cumulative effect of a
change in accounting principle $ 0.51 $ 0.08 $ (0.37)
Cumulative effect of a change in accounting principle -- -- (0.33)
-------- -------- --------
Net income (loss) $ 0.51 $ 0.08 $ (0.70)
======== ======== ========
Diluted
Before a cumulative effect of a
change in accounting principle $ 0.51 $ 0.08 $ (0.37)
Cumulative effect of a change in accounting principle -- -- (0.33)
-------- -------- --------
Net income (loss) $ 0.51 $ 0.08 $ (0.70)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
19
Exhibit 13
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Accumulated
Additional Other
Common Stock Paid-in Comprehensive Excess Retained
(in thousands, except share amounts) Shares Amount Capital (Loss) Distributions Earnings
---------- ------ ---------- ------------- ------------- ------------
Balance, January 1, 2000 18,715,447 $187 $150,974 $(33) $(29,500) $ 4,195
Net income -- -- -- -- 9,606
Foreign currency translation loss -- -- -- (16) --
Stock issued in connection with
acquisitions 272,799 3 986 -- -- --
---------- ---- -------- ---- -------- --------
2000 Comprehensive Income
Balance, December 31, 2000 18,988,246 190 151,960 (49) (29,500) 13,801
Net income -- -- -- -- -- 1,601
Foreign currency translation loss -- -- -- (15) -- --
Stock issued in connection with:
Acquisitions 225,527 2 1,666 -- -- --
Exercise of employee stock options 29,476 -- 258 -- -- --
---------- ---- ------- ---- -------- --------
2001 Comprehensive Income
Balance, December 31, 2001 19,243,249 192 153,884 (64) (29,500) 15,402
Net loss -- -- -- -- -- (13,484)
Foreign currency translation gain -- -- -- 4 -- --
Stock Issued in connection with the
exercise of employee stock options 8,500 1 49 -- -- --
---------- ---- -------- ---- -------- --------
2002 Comprehensive Loss
Balance, December 31, 2002 19,251,749 $193 $153,933 $(60) $(29,500) $ 1,918
========== ==== ======== ==== ======== ========
Comprehensive
(in thousands, except share amounts) Total Income (Loss)
-------- -------------
Balance, January 1, 2000 $125,823
Net income 9,606 $ 9,606
Foreign currency translation loss (16) (16)
Stock issued in connection with
acquisitions 989 --
-------- --------
2000 Comprehensive Income $ 9,590
========
Balance, December 31, 2000 136,402
Net income 1,601 $ 1,601
Foreign currency translation loss (15) (15)
Stock issued in connection with:
Acquisitions 1,668 --
Exercise of employee stock options 258 --
-------- --------
2001 Comprehensive Income $ 1,586
========
Balance, December 31, 2001 139,914
Net loss (13,484) $(13,484)
Foreign currency translation gain 4 4
Stock Issued in connection with the
exercise of employee stock options 50 --
-------- --------
2002 Comprehensive Loss $(13,480)
========
Balance, December 31, 2002 $126,484
========
The accompanying notes are an integral part of these consolidated financial
statements.
20
Exhibit 13
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands) 2000 2001 2002
-------- -------- --------
Cash flows from operating activities
Net income (loss) $ 9,606 $ 1,601 $(13,484)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash unusual items and other charges -- 3,111 16,987
Depreciation and goodwill amortization 8,483 10,879 6,465
Changes in operating assets and liabilities:
Cash held in escrow 8,690 6,342 7,180
Trade and other receivables, net (1,507) 791 4,700
Deferred revenue and property owner payables 4,451 (12,754) (5,055)
Accounts payable and accrued liabilities 407 (819) 105
Deferred income taxes 3,756 5,049 (4,033)
Other, net (3,310) (3,936) 1,818
-------- -------- --------
Net cash provided by operating activities 30,576 10,264 14,683
-------- -------- --------
Cash flows from investing activities
Cash portion of acquisitions, net (8,290) (25,585) (2,962)
Purchases of property, equipment and software (11,057) (16,218) (7,298)
-------- -------- --------
Net cash used in investing activities (19,347) (41,803) (10,260)
-------- -------- --------
Cash flows from financing activities
Credit Facility borrowings 40,000 87,400 103,200
Credit Facility repayments (52,000) (58,800) (106,750)
Payment of capital lease and other debt obligations (333) (1,389) (277)
Exercise of employee stock options -- 258 50
Repayments from issuance of secured mortgage notes (5,734) -- --
-------- -------- --------
Net cash provided by (used in) financing activities (18,067) 27,469 (3,777)
-------- -------- --------
Net change in cash and cash equivalents (6,838) (4,070) 646
Cash and cash equivalents, beginning of period 11,121 4,283 213
-------- -------- --------
Cash and cash equivalents, end of period $ 4,283 $ 213 $ 859
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
21
Exhibit 13
RESORTQUEST INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
In these footnotes, the words "Company," "ResortQuest," "we," "our" and
"us" refer to ResortQuest International, Inc., a Delaware corporation, and its
wholly-owned subsidiaries, unless otherwise stated or the context requires
otherwise.
NOTE 1 - BASIS OF PRESENTATION
Organization and Principles of Consolidation
ResortQuest is one of the world's leading vacation rental property
management companies with over 20,000 units under management. We are the first
company offering vacation condominium and home rentals, sales and management
under an international brand name in over 50 premier destination resorts located
in the continental United States, Hawaii and Canada. Our consolidated financial
statements include the accounts of ResortQuest and its wholly-owned subsidiaries
after elimination of all significant intercompany accounts and transactions.
Acquisitions
During 2000, we completed three acquisitions for a total cost of $9.2
million, including earn-up payments related to certain 1999 acquisitions, with
10.7% of the net consideration paid in the form of common stock with an
aggregate value of $989,000, net of retired escrow shares, and the remaining
$8.3 million of consideration paid in cash, net of unrestricted cash acquired.
During 2001, we completed eight acquisitions for a total cost of $27.2 million,
including earn-up payments related to previous acquisitions, with 6.1% of the
net consideration paid in the form of common stock with an aggregate value of
$1.7 million, and the remaining $25.5 million of consideration paid in cash, net
of unrestricted cash acquired. During 2002, we made net cash payments
approximating $3.0 million for earn-up payments related to certain 2001
acquisitions and other purchase accounting adjustments related to these
acquisitions. All acquisitions were accounted for under the purchase method of
accounting. The following proforma results assume the 2001 acquisitions had
occurred on January 1, 2000:
Years End December 31,
(in thousands, unaudited) 2000 2001
--------- --------
Revenues
ResortQuest $ 183,261 $ 192,955
Acquisitions 17,435 796
--------- ---------
Proforma Revenues $ 200,696 $ 193,751
========= =========
Net income
ResortQuest $ 9,606 $ 1,601
Acquisitions 395 (173)
--------- ---------
Proforma Combined Net income $ 10,001 $ 1,428
========= =========
Basic and Diluted EPS
ResortQuest $ 0.51 $ 0.08
Acquisitions 0.02 (0.01)
--------- ---------
Proforma Basic and Diluted EPS $ 0.53 $ 0.07
========= =========
These unaudited proforma results are presented for comparative purposes
only. The proforma results are not necessarily indicative of what our actual
results would have been had the acquisitions been completed at the beginning of
these periods, or of future results.
22
Exhibit 13
Acquisition and Financing Costs
Costs incurred in the course of our evaluation of acquisition candidates
and the ultimate consummation of acquisitions consist primarily of attorneys'
fees, accounting fees and other costs incurred by us in identifying and closing
transactions. These costs incurred are deferred on the balance sheet until the
related transaction is either consummated or terminated. There were no deferred
acquisition costs at December 31, 2001 and 2002. All acquisitions since January
1,2000 have been accounted for under the purchase method of accounting, which
requires that all transaction costs and the excess of the purchase price over
the fair value of identified net assets acquired be reflected as goodwill. Prior
to 2002, goodwill was amortized over a life up to 40 years and was calculated
based on a preliminary estimate that is adjusted to its final balance within one
year of the close of the acquisition (see Note 2). Additionally, certain of our
acquisitions have "earn-up" provisions that require additional consideration to
be paid if certain operating results are achieved over periods of up to three
years. This additional consideration is recorded as goodwill when the amount is
fixed and determinable.
Similar treatment is followed in recording costs incurred by us in the
course of generating additional debt or equity financing. Deferred financing
costs approximated $1.6 million and $862,000, respectively, at December 31, 2001
and 2002 and are amortized as interest expense over the remaining term of the
financing.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Property Management Fees
We receive property management fees when the properties are rented, which
are generally a percentage of the rental price of the vacation property.
Management fees range from approximately 3% to over 40% of gross lodging
revenues collected based upon the type of services provided by us to the
property owner and the type of rental units managed. Revenues are recognized
ratably over the rental period based on our proportionate share of the total
rental price of the vacation condominium or home. We require certain minimum
deposits when reservations are booked. These deposits are recorded as a
component of deferred revenue and property owner payables. Revenues from
cancellations are recorded at the time of cancellation.
Service Fees
We internally provide or arrange through third parties certain services for
property owners or guests. Service fees include reservations, housekeeping,
long-distance telephone, ski rentals, lift tickets, beach equipment and pool
cleaning. Internally provided services are recognized as service fee revenue
when the service is provided. Services provided by third parties are generally
billed directly to property owners and are not included in the accompanying
consolidated financial statements.
Real Estate and Other
We recognize other revenues primarily related to real estate broker
commissions, food & beverage sales and software and maintenance sales. We have
real estate broker sales operations in 31 resort locations. We recognize
revenues on real estate sales when the transactions are complete, and such
revenue is recorded net of the related agent commissions. We also manage food &
beverage operations in connection with the management of larger condominium
complexes, primarily in Hawaii and Florida. We recognize food and beverage
revenue at the time of sale. ResortQuest Technologies sells a fully integrated
software package, First Resort Software, specifically designed for the vacation
property management business, along with ongoing service contracts. Software and
maintenance revenues are recognized when the systems are installed and ratably
over the service period, respectively.
23
Exhibit 13
Real estate and other revenues were as follows:
Years Ended December 31,
(in thousands) 2000 2001 2002
------- ------- -------
Real estate brokerage commissions, net $17,188 $15,260 $16,926
Food & beverage 4,575 4,176 4,390
Software sales and service 3,330 2,982 2,564
Other 1,298 1,917 1,504
------- ------- -------
$26,391 $24,335 $25,384
======= ======= =======
Direct Operating Expenses
Direct operating expenses include expenses related to housekeeping,
maintenance, reservations, marketing and advertising, and other costs associated
with rental and management. Direct operating expenses also include the cost of
sales and operating expenses for food & beverage and software sales and service
as follows:
Years Ended December 31,
(in thousands) 2000 2001 2002
------- ------- -------
Rental and management related $73,989 $78,258 $77,547
Food & beverage 4,465 3,578 4,099
Software sales and service 1,860 2,002 1,961
------- ------- -------
$80,314 $83,838 $83,607
======= ======= =======
Advertising and Marketing
In accordance with the AICPA's Statement of Position ("SOP") No. 93-7
"Reporting on Advertising Costs," the Company expenses advertising and marketing
costs as incurred or as the advertising takes place. Internet portal agreements
are treated as advertising and are expensed ratably over the lesser of the
contract period or the benefit period. Excluding payroll related items, the
Company expensed $12.8 million in advertising and marketing costs during 2002.
Comprehensive Income
The Company follows the Financial Accounting Standards Board's ("FASB")
Statement No. 130, "Reporting Comprehensive Income," which established standards
for reporting and display of comprehensive income and its components. Other
comprehensive income consists of foreign currency translation gains and losses
and is presented in the consolidated statements of stockholders' equity and
comprehensive income (loss).
24
Exhibit 13
Stock-Based Compensation
ResortQuest applies the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for options granted under
the Incentive Plan. No compensation cost has been recognized in the consolidated
Statements of Operations for issued options. In accordance with Statement No.
123, "Accounting for Stock-Based Compensation," ResortQuest has estimated the
fair value of each option grant using the Black-Scholes Option-Pricing Model.
Had compensation cost for awards under the Incentive Plan been determined based
on the fair value at the grant dates, ResortQuest's net income and earnings per
share would have been reduced to the pro forma amounts indicated in the
following table:
Years Ended December 31,
(in thousands, except per share amounts) 2000 2001 2002
------ ------- -------
Net income (loss)
As reported $9,606 $1,601 $(13,484)
Less: Pro forma stock-based employee compensation expense 1,012 398 752
------ ------ --------
Pro forma $8,594 $1,203 $(14,236)
====== ====== ========
Basic earnings (loss) per share
As reported $ 0.51 $ 0.08 $ (0.70)
Less: Pro forma stock-based employee compensation expense 0.06 0.02 0.04
------ ------ --------
Pro forma $ 0.45 $ 0.06 $ (0.74)
====== ====== ========
Diluted earnings (loss) per share
As reported $ 0.51 $ 0.08 $ (0.70)
Less: Pro forma stock-based employee compensation expense 0.06 0.02 0.04
------ ------ --------
Pro forma $ 0.45 $ 0.06 $ (0.74)
====== ====== ========
See Note 10 for further information regarding stock options.
Cash and Cash Equivalents
For the purposes of the consolidated balance sheets and statements of cash
flows, we consider all investments with original maturities of three months or
less to be cash equivalents.
Cash Held in Escrow
Cash held in escrow primarily represents guest advance deposits held in
escrow for lodging reservations and deposits on real estate transactions. Upon
the occurrence of the guest's stay, the lodging reservation deposits are
withdrawn from escrow as we recognize our revenue, ratably over the guest's
stay, with the remaining amounts being disbursed to the homeowners of our
managed properties. Upon the legal closing of a real estate transaction that we
broker, real estate deposits are withdrawn from escrow as we recognize our
commission revenue, net of any agent commissions.
Inventories
Inventories consist primarily of linens and food & beverage items that are
recorded at the lower of cost or market as a component of Other current assets.
Property, Equipment and Software
Property, equipment and software are stated at cost or, in the case of
equipment acquired under capital leases, the present value of future lease
payments. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets or the lease terms.
25
Exhibit 13
We account for the costs of computer software developed or obtained for
internal use in accordance with SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." In accordance with
SOP No. 98-1, during 2000, 2001 and 2002, we capitalized $3.0 million, $6.4
million and $1.8 million, respectively, of software development costs, primarily
related to outside professional fees and internal payroll and related benefits.
At December 31, 2001 and 2002, Property, equipment and software in the
accompanying consolidated balance sheets includes $9.0 million and $8.9 million,
respectively, in capitalized software developed or obtained for internal use,
net of amortization.
We account for the costs of computer software developed or obtained for
internal use that is also sold or otherwise marketed in accordance with FASB
Statement No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." In accordance with Statement No. 86, during
2000, 2001 and 2002, we capitalized $4.6 million, $6.6 million and $1.7 million,
respectively, of software development costs, primarily related to outside
professional fees and internal payroll and related benefits. At December 31,
2001 and 2002, Property, equipment and software in the accompanying consolidated
balance sheets included $9.7 million and $4.6 million, respectively, in
capitalized software developed or obtained for internal use that is also sold or
otherwise marketed, net of amortization.
These costs are being amortized on a straight-line basis over the estimated
useful lives of the related projects ranging from three to ten years. In
accordance with Statement No. 86, we periodically, or upon the occurrence of
certain events, review these capitalized software cost balances for impairment.
During 2001 and 2002, general and administrative expenses include a $1.5 million
and a $6.4 million, respectively, write-down of capitalized software development
costs, net of accumulated amortization, related to versions of First Resort
Software that were developed for internal use and marketed to be sold (see Note
4).
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. Upon retirement or
disposition of property, equipment and software, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the consolidated Statements of Operations.
Goodwill
Goodwill is the excess of the purchase price over fair value of identified
net assets acquired in business combinations accounted for under the purchase
method of accounting. Through 2001, goodwill was amortized on a straight-line
basis over 40 years, other than that associated with the acquisition of First
Resort Software, Inc., which was amortized over 15 years, representing the
approximate remaining useful life of acquired assets. On January 1, 2002,
goodwill amortization ceased upon the adoption of a new accounting pronouncement
related to goodwill and intangible assets. Goodwill balances are reviewed for
impairment at least annually, as well as when circumstances indicate that the
carrying amount may not be recoverable (see "New Account Pronouncements"). We
recorded goodwill amortization of $4.9 million and $5.7 million in 2000 and
2001, respectively.
The following table summarizes the changes in the carrying amount of
goodwill broken out by segment (see Note 13 for further discussion on segments):
2001 2002
------------------------------- -------------------------------
Property Property
(in thousands): Management Other Total Management Other Total
---------- ------ ------- ---------- ------ -------
Balance as of January 1, $157,004 $28,729 $185,733 $188,821 $27,713 $216,534
Cash portion of acquisitions and
earn-up related payments 25,585 -- 25,585 1,667 -- 1,667
Stock portion of earn-up payments 1,668 -- 1,668 -- -- --
Non-cash acquisition adjustments 9,218 -- 9,218 -- -- --
Statement No. 142 transition impairment -- -- -- (8,131) -- (8,131)
Other Statement No. 142 impairment -- -- -- -- (4,240) (4,240)
Amortization (4,654) (1,016) (5,670) -- -- --
-------- ------- -------- -------- ------- --------
Balance as of December 31, $188,821 $27,713 $216,534 $182,357 $23,473 $205,830
======== ======= ======== ======== ======= ========
26
Exhibit 13
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment upon the occurrence of events
or changes in circumstances that indicate that the carrying value of the assets
may not be recoverable, as measured by comparing their net book value to the
estimated future cash flows generated by their use. Assets held for sale are
recorded at fair market value, determined principally using discounted future
cash flows.
Excess Distributions
In conjunction with the 1998 roll-up initial public offering of ResortQuest
International, Inc., the cash purchase price paid to the largest founding
company designated as the accounting acquiror was recorded as a distribution to
owner and recorded in the consolidated balance sheet as an excess distribution.
New Accounting Pronouncements
During the quarter ended March 31, 2002, we changed our method of
accounting for reimbursable costs to conform to the FASB's Emerging Issues Task
Force Consensus No. 01-14, "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred" ("EITF No. 01-14"), effective
for us on January 1, 2002. As a result, reimbursements received are recorded as
revenue and the costs incurred on behalf of managed associations and properties
are recorded as expenses. These costs, which relate primarily to payroll costs
at managed properties and associations where we are the employer, are reflected
in other revenue and expenses from managed entities in the consolidated
statements of operations. Revenues and expenses for the prior periods have been
reclassified to conform with the current year presentation. As the
reimbursements are made based upon the costs incurred with no added margin
resulting in the expenses and related revenues being identical, the adoption of
EITF No. 01-14 did not have any effect on our operating income, total or per
share net income, cash flows or financial position.
In June 2001, the FASB issued Statement No. 141, "Business Combinations,"
and No. 142, "Goodwill and Other Intangible Assets." Statement No. 141
eliminated the pooling-of-interests method of accounting for business
combinations and requires all transactions initiated after June 30, 2001, to be
accounted for using the purchase method. Under Statement No. 142, goodwill
related to our future acquisitions is not subject to amortization, and goodwill
related to our historical acquisitions is no longer amortized as of January 1,
2002. The following table presents adjusted net income and earnings per share
excluding goodwill amortization for the periods ended December 31:
2000 2001 2002
---------- ---------- ----------
Reported income (loss) before cumulative effect of a change
in accounting principle $ 9,606 $ 1,601 $ (7,204)
Add back goodwill amortization 4,934 5,670 --
---------- ---------- ----------
Adjusted income (loss) before cumulative effect of a change
in accounting principle 15,540 7,271 (7,204)
Cumulative effect of a change in accounting principle -- -- (6,280)
---------- ---------- ----------
Adjusted net income (loss) $ 15,540 $ 7,271 $ (13,484)
========== ========== ==========
Earnings per share
Basic
Before cumulative effect of a change in accounting principle $ 0.51 $ 0.08 $ (0.37)
Add back goodwill amortization 0.26 0.30 --
---------- ---------- ----------
Adjusted income(loss) before cumulative effect of a change
in accounting principle 0.77 0.38 (0.37)
Cumulative effect of a change in accounting principle -- -- (0.33)
---------- ---------- ----------
Adjusted net income (loss) $ 0.77 $ 0.38 $ (0.70)
========== ========== ==========
Diluted
Before cumulative effect of a change in accounting principle $ 0.51 $ 0.08 $ (0.37)
Add back goodwill amortization 0.26 0.29 --
---------- ---------- ----------
Adjusted income (loss) before cumulative effect of a change
in accounting principle 0.77 0.37 (0.37)
Cumulative effect of a change in accounting principle -- -- (0.33)
---------- ---------- ----------
Adjusted net income (loss) $ 0.77 $ 0.37 $ (0.70)
========== ========== ==========
Goodwill is subject to reviews for impairment at least annually and upon
the occurrence of certain events, and if impaired, a write-down will be
recorded. Upon our adoption of Statement No. 142, our software operations and
each of our geographical resort regions with assigned goodwill were each valued
as a reporting unit. If the fair value of the reporting unit exceeds the book
value, including assigned goodwill, no further testing is required. However, if
the book value, including goodwill, is less than the fair value of the reporting
unit, the assets and liabilities of the reporting unit and the fair value of the
assets is the implied fair value of goodwill. To the extent that the implied
fair value of goodwill was
27
Exhibit 13
less than the book value of goodwill, an impairment charge was recognized as a
cumulative effect of a change in accounting principle. Based on this test, we
recorded a non-cash $8.1 million write-down of our goodwill in the first quarter
of 2001 related to our Desert resort operations, partially off-set by a $1.9
million income tax benefit. The Desert resort operations are expected to
continue to experience declining cash flows as a result of the economics of the
Desert markets. During December 2002, management made changes to its software
operations strategy that included a redefinition of its target market for First
Resort Software. Prior to this strategy shift, the latest version of First
Resort Software was being designed to meet the needs of essentially all
companies in our industry. The new strategy is to focus on the needs of small to
medium-sized property management companies, which make up the majority of the
industry. This change necessitated a $4.2 million write-down of the goodwill
related to the software operations and a $6.4 million write-down of certain
capitalized software development costs. As these write-downs were recorded after
the initial adoption of this standard, a $10.6 million non-cash charge is
reflected in general and administrative expenses in our 2002 income statement.
We have completed the process of evaluating the impact of Statement No.
143, "Accounting for Asset Retirement Obligations," and we do not expect this
statement to have a material impact on our financial position or results of
operations upon its adoption in 2003.
Effective January 1, 2002 we adopted Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets"; the adoption of this statement did
not have a material impact to our financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement provides for the rescissions or amendment of
certain previously issued accounting standards. The various provisions of this
standard are effective for either 2002 or 2003. Also during the quarter ended
June 30, 2002, Statement No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued and is effective for activities initiated after
December 31, 2002. We do not expect Statement No. 145 or No. 146 to have a
material impact on our financial position or results of operations upon their
adoption in 2003.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions," which applies to all acquisitions of financial
institutions except those between two or more mutual enterprises. Statement No.
147 has no impact on our financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure - an Amendment of FASB
Statement No. 123," to provide alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. Statement No. 148 also requires disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of Statement No. 148 are
effective for fiscal years ending after December 15, 2002, and the disclosure
provisions have been applied in our 2002 financial statements. We will implement
the interim disclosure provisions in first quarter 2003.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on existing
disclosure requirements for most guarantees including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues a
guarantee, the Company must recognize an additional liability for the fair value
or market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and initial measurement provisions apply on a prospective
basis to guarantees issued or modified after December 31, 2002, the disclosure
requirements in the interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company has fully
implemented the disclosure requirements of FIN 45 and will adopt the additional
provisions for all qualifying transactions entered into after December 31, 2002.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN 46 addresses consolidation by business enterprises where
equity investors do not bear the residual economic risks and rewards. These
entities have been commonly referred to as "special purpose entities." Companies
are required to apply the provision of FIN 46 prospectively for all variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. All
interests acquired before February 1, 2003 must follow the new rules in
accounting periods beginning after June 15, 2003. FIN 46 is expected to have no
impact on our consolidated results of operations or financial position.
Financial Instruments
As we do not have any derivatives, the carrying values of all financial
instruments, excluding fixed-rate borrowings, approximate their estimated fair
values. At December 31, 2001 and 2002, $50.1 million of our long-term borrowings
accrue interest at fixed rates. Based on the borrowing rates currently available
to us for bank loans with similar terms and average maturities, the fair value
of these borrowings was $49.8 million and $49.5 million at December 31, 2001 and
2002, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Geographic Concentration of Risk
28
Exhibit 13
Our property management operations are concentrated in the states of
Colorado, Hawaii and Florida. For the year ended December 31, 2002, Colorado,
Hawaii and Florida accounted for 11%, 28% and 31%, respectively, of our
consolidated revenues.
NOTE 3 - NOTE RECEIVABLE
During 1998, we formalized a $4.0 million promissory note resulting from
cash advances to a primary stockholder of a predecessor company who is no longer
an affiliate of ResortQuest. On February 16, 2000, this Note was restructured in
order to provide for additional collateral. At this time, certain management fee
receivables and accrued interest of approximately $1.1 million were also
aggregated into a separate note (collectively, the "Notes"). The Notes are
collateralized by certain real estate held by the stockholder and bear interest
at 1/2% below the prime rate of interest, but not less than 6% and not more than
10%. The remaining balance on the $1.1 million note plus accrued interest was
paid in full during 2001. Interest payments under the $4.0 million note are due
every January and July 1st, with the principal balance recorded in Other assets
in the accompanying consolidated balance sheets being due in full on May 25,
2008. To date, all interest payments due under the restructured terms of the
Notes have been received.
NOTE 4 - UNUSUAL ITEMS AND OTHER CHARGES
General and administrative expenses for 2001 include $4.7 million of items
that management considers as unusual items and other charges. These charges
include a $1.5 million non-cash write-down of certain previously released First
Resort Software versions, a $1.3 million non-cash write-off of deferred
acquisition costs related to acquisition candidates that will no longer be
pursued, $1.6 million in employee-related and other cash charges and $303,000 in
non-cash items primarily related to the write-off of miscellaneous receivables.
General and administrative expenses for 2002 include $15.1 million of items
that management considers as unusual items and other charges. These charges
include a $10.6 million non-cash write-down of certain capitalized software
development costs and intangibles related to the Company's vacation rental
management software, First Resort Software, $2.6 million in severance and
employee-related charges, $1.1 million in professional fees and expenses related
to a study to explore financing and strategic growth alternatives and an offer
to acquire the Company that was determined by the Board, after appropriate
review, not to be in the best interests of the Company and its shareholders, and
$760,000 of other charges related to property and office closings and
consolidations. The $10.6 million write-down relates to the Company's change in
strategy that included a redefinition of its target market for First Resort
Software. Prior to this strategy shift, the latest version of First Resort
Software was being designed to meet the needs of essentially all companies in
our industry. The new strategy is to focus on the needs of small to medium-sized
property management companies, which make up the majority of the industry. This
change necessitated a write-down of certain capitalized development costs and
intangibles related to the software as recorded on the Company's balance sheet.
The severance and employee-related charges primarily relate to the fourth
quarter senior management changes and the majority of these costs will be paid
out over the next three years. The property and office closings include the
closing of Shoreline Properties in Ohio and the consolidation and closings of
offices in Dillon, Lafayette, and Basalt, Colorado; Memphis, Tennessee; and
Hilton Head, South Carolina. The Company will realize significant payroll and
lease expense savings through these consolidations.
The following table summarizes all activities and positions related to the
unusual items and other charges (in thousands):
Office
Employee Closings Deferred Deferred
Related Software and Other Acquisition Transaction
Items Development Misc. Costs Costs Total
----- ----------- ----- ----- ----- -----
2001 expense $ 1,566 $ 1,488 $ 303 $ 1,320 $ -- $ 4,677
Less: non cash charges -- (1,488) (303) (1,320) -- (3,111)
Less: cash payments (1,292) -- -- -- -- (1,292)
------- -------- ----- ------- ------- --------
Accrual at December 31, 2001 274 -- -- -- -- 274
2002 expense 2,661 10,594 759 - 1,053 15,067
Less: non cash charges - (10,594) (112) - - (10,706)
Less: cash payments (955) - (37) - (1,053) (2,045)
------- -------- ----- ------- ------- --------
Accrual at December 31, 2002 1,980 -- 610 -- -- 2,590
------- -------- ----- ------- ------- --------
Less: current portion (1,006) -- (187) -- -- (1,193)
------- -------- ----- ------- ------- --------
Long-term portion of accrual $ 974 $ -- $ 423 $ -- $ -- $ 1,397
======= ======== ===== ======= ======= ========
NOTE 5 - SUPPLEMENTAL FINANCIAL INFORMATION
Trade and other receivables, net consisted of the following:
29
Exhibit 13
As of December 31,
(in thousands) 2001 2002
------- ------
Receivables from managed properties $ 3,009 $2,972
Income tax receivables 4,976 37
All other receivables 3,045 3,489
------- ------
Total 11,030 6,498
Less - allowance for doubtful accounts (489) (657)
------- ------
$10,541 $5,841
======= ======
Other current assets consisted of the following:
As of December 31,
(in thousands) 2001 2002
------- ------
Inventories $2,860 $2,984
Prepaid expenses 2,460 $1,490
Other 743 333
------ ------
$6,063 $4,807
====== ======
Property, equipment and software, net consisted of the following:
Estimated Useful As of December 31,
(in thousands) Life in Years 2001 2002
---------------- -------- -------
Land and improvements $ 2,407 $ 2,706
Building and improvements 15-30 7,821 7,707
Leasehold improvements 5-30 3,973 3,890
Furniture, fixtures and equipment 3-10 14,780 17,687
Vehicles 5- 7 2,814 2,465
Software and web development 3-10 19,987 17,077
Leased property 3- 7 1,272 949
-------- -------
Total 53,054 52,481
Less - accumulated depreciation (13,545) (18,381)
-------- -------
$ 39,509 $34,100
======== =======
Accounts payable and accrued liabilities consisted of the following:
As of December 31,
(in thousands) 2001 2002
------- -------
Accounts payable $ 6,098 $ 5,765
Accrued payroll 5,345 6,416
Other accrued liabilities 2,855 2,447
------- -------
$14,298 $14,628
======= =======
Supplemental cash flow information is as follows:
Years Ended December 31,
(in thousands) 2000 2001 2002
------- -------- --------
Supplemental disclosure of cash flow information
Cash paid for interest $ 6,028 $ 5,688 $ 6,827
======= ======== ========
Cash paid for income taxes $ 5,919 $ 1,846 $ 82
======= ======== ========
Supplemental disclosure of non-cash flow information
Capital lease obligations $ 674 $ 360 $ --
======= ======== ========
Common stock portion of acquisitions $ 989 $ 1,668 $ --
======= ======== ========
NOTE 6 - LONG-TERM DEBT
On January 22, 2001, we replaced our existing Credit Facility that was to
expire on May 26, 2001 with a similar facility that expires on January 22, 2004.
Due to the events of September 11th, on October 30, 2001, we amended the Credit
Facility to modify the restrictive covenants to allow more flexibility for us
under this debt agreement through the end of 2002. The amendment also allowed
for up to a 100 basis point increase to our interest rate based on certain
financial ratios. Subject
30
Exhibit 13
to certain limitations, the Credit Facility may be used to borrow up to $40
million for capital expenditures and for general corporate purposes. Available
borrowings are reduced by open letters of credit. The credit agreement requires
us to comply with various loan covenants, which include maintenance of certain
financial ratios, restrictions on additional indebtedness and restrictions on
liens, guarantees, advances, capital expenditures, sale of assets and dividends.
Interest on outstanding balances of the Credit Facility is computed at our
election, on the basis of either the Prime Rate or the Eurodollar Rate, as
defined, plus a margin of 2.0% up to 3.0% based on the amendment discussed
above. At December 31, 2002, the weighted average interest rate on the $25.0
million in outstanding indebtedness was 4.57%. Availability fees are 0.5% per
annum and are payable on the unused portion of the Credit Facility. Interest and
availability fees are payable monthly.
On June 16, 1999, we issued $50 million of Senior Notes, due June 2004, in
connection with a note purchase agreement. On October 30, 2001, we also amended
the Senior Notes to modify the restrictive covenants through the end of 2002 to
allow more flexibility for us under this debt agreement. The amendment also
allowed for up to a 100 basis point increase to our interest rate based on
certain financial ratios. At December 31, 2002, the interest rate on the Senior
Notes was 10.06%. The note purchase agreement contains loan covenants
substantially similar to those of the credit agreement under the Credit Facility
and has prepayment restrictions. Interest is payable quarterly.
The Credit Facility is secured pari passu to the Senior Notes by
substantially all of our assets, including the stock of our significant
subsidiaries, as defined. Due to the unusual items and other charges recorded
during the fourth quarter of 2002, we were not in compliance with certain
covenants related to our Credit Facility and Senior Notes. During March 2003 we
finalized an amendment to our borrowing agreements to bring us into compliance
which required us to pay a 1.4% amendment fee approximating $1.3 million. The
amendment will allow more flexibility for us under the debt agreement through
the end of 2003. Management is currently in discussions to refinance all
outstanding borrowings during 2003. There is no assurance that we will be able
to refinance these borrowings and significant changes to the current terms, such
as interest rates and restrictive covenants, may result from any refinancing.
31
Exhibit 13
Long-term debt consisted of the following:
As of December 31,
(in thousands) 2001 2002
------- -------
Senior Notes $50,000 $50,000
Credit Facility 28,600 25,045
Various notes with banks, secured by certain assets, at interest rates
ranging from 1.9% to 10.0%, due between March 2002 through December 2003 71 15
Capital lease obligations 295 79
------- -------
Total 78,966 75,139
Less - current maturities (322) (94)
------- -------
Long-term debt, net of current maturities $78,644 $75,045
======= =======
Annual maturities of long-term debt are: 2003, $94,000; 2004, $75.0 million; and
none thereafter.
NOTE 7 - OPERATING LEASES
ResortQuest has entered into non-cancelable operating leases for equipment,
operating space, office space, hotel properties and individual condominium units
within its managed properties. At December 31, 2002, future minimum lease
commitments under non-cancelable operating leases are as follows:
(in thousands) Years Ended December 31,
------------------------
2003 $ 7,465
2004 6,271
2005 5,756
2006 4,876
2007 3,404
Thereafter 13,411
-------
$41,183
=======
Under terms of the leases, ResortQuest is generally required to pay all
taxes, insurance and maintenance. Rent expense for 2000, 2001 and 2002 was
approximately $5.9 million, $7.2 million and $7.6 million, respectively.
In conjunction with certain acquisitions, ResortQuest entered into several
lease agreements with certain former owners, that have also served on the
Company's Board of Directors at some point in the past three years, for the use
of office space and facilities. Lease payments made to these former owners
during 2000, 2001 and 2002 were approximately $410,000, $433,000 and $231.000,
respectively.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Guarantees
Certain of our management agreements in Hawaii contain provisions for
guaranteed levels of returns to owners. These agreements also contain force
majeure clauses to protect the Company from forces or occurrences beyond the
control of management. During 2000, 2001 and 2002, ResortQuest made payments in
excess of the management fees earned on these guaranteed agreements of $390,000,
$704,000 and $334,000, respectively.
Acquisition Indemnification
Subject to certain limitations, pursuant to the Agreement and Plan of
Organization entered into by and between each acquired entity and ResortQuest
(each an "Agreement"), the stockholders of each acquired entity have indemnified
ResortQuest against losses, claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses as a result of or arising
from any breach of the representations and warranties in the Agreement, any
liability under the Securities Act of 1933 ("1933 Act"), the Securities Exchange
Act of 1934 ("1934 Act") or other federal or state law or regulation arising out
of or based upon any untrue statement of a material fact relating solely to an
acquired entity or the stockholders and certain other identified claims or
litigation.
In addition, pursuant to each Agreement and subject to certain limitations,
ResortQuest agreed to indemnify the stockholders against losses, claims,
damages, actions, suits, proceedings, demands, assessments, adjustments, costs
and expenses incurred by the stockholders as a result of or arising from any
breach by ResortQuest or of its representations and warranties in the Agreement,
any liability under the 1933 Act, the 1934 Act or other federal or state law or
regulation, at common law or otherwise, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact
32
Exhibit 13
relating to ResortQuest or any of the acquired entities contained in certain
filings with the Securities and Exchange Commission or the matters described in
the schedules to the Agreement relating to guarantees.
ResortQuest is not aware of any events that have or could have caused any
party to act under such indemnification under any of the Agreements during the
periods presented in the accompanying consolidated financial statements.
Litigation
On May 26, 2000, Hotel Corp. of the Pacific, Inc., a wholly-owned
subsidiary of ResortQuest International doing business as Aston Hotels &
Resorts, instituted legal proceedings in the Circuit Court for the First Circuit
of Hawaii against Andre S. Tatibouet, the then president of Hotel Corp. This
action arose out of a document styled "Cooperation Agreement" that was signed by
Andre S. Tatibouet, purporting to act on behalf of Hotel Corp., on the one hand,
with Cendant Global Services B.V. and Aston Hotels & Resorts International,
Inc., on the other hand. The Cooperation Agreement contains several provisions
that are detrimental to Hotel Corp., including provisions purporting to transfer
certain intellectual property and limit certain intellectual property rights
held by Hotel Corp. Monetary damages for breach of fiduciary duty, fraud, and
negligent misrepresentation were sought by Hotel Corp. By order of the Circuit
Court, the claims asserted by Hotel Corp. in the lawsuit were consolidated with
an arbitration demand, filed with the American Arbitration Association by Mr.
Tatibouet, in which he alleged various breaches of his employment agreement with
Hotel Corp.
The arbitration hearing took place in September 2001, where Mr. Tatibouet
claimed damages of approximately $17.5 million and ResortQuest claimed damages
of approximately $4.7 million. On March 14, 2002, the arbitration panel issued
its Reasoned Opinion and Final Award. The panel concluded that Mr. Tatibouet had
breached his fiduciary duty to Hotel Corp. and awarded Hotel Corp. $55,559
related to the reimbursement of certain legal expenses. The panel denied all of
Mr. Tatibouet's claims and requests for damages as well as declaratory and other
relief.
On May 26, 2000, ResortQuest International and Hotel Corp. brought an
action in the Circuit Court for the First Circuit of Hawaii against Cendant
Corporation, Aston Hotels & Resort International Inc. and Cendant Global
Services B.V ("Defendants") seeking damages for breach of contract against
Cendant, and the equitable remedies or rescission and replevin. This action
arose out of Mr. Andre S. Tatibouet's purported negotiation on behalf of Hotel
Corp. of the Pacific, Inc., a subsidiary of ResortQuest International, of a
document styled Cooperation Agreement.
ResortQuest and Cendant entered into an amended Cooperation Agreement on
July 15, 2002. As a result of the execution of that agreement, on July 15, 2002
ResortQuest moved to dismiss its court action against Defendants by filing a
stipulation for complete dismissal with prejudice as to all claims and parties.
We are also involved in various legal actions arising in the ordinary
course of our business. We do not believe that any of the remaining actions will
have a material adverse effect on our business, financial condition or results
of operations.
Insurance
ResortQuest carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies during the periods presented in the
accompanying consolidated financial statements.
33
Exhibit 13
Employee Health Insurance
We introduced a national healthcare plan on August 1, 2000 for all domestic
team members. The plan provides a broad spectrum of healthcare choices for all
full-time team members to select the coverage that best suits their needs. The
plan includes medical, dental, vision, life, AD&D, LTD and voluntary life
insurance coverages. The employee medical and dental coverages are self-insured
by the Company. All self-insurance reserves include accruals of estimated
settlements for known claims, as well as accruals for estimates of incurred, but
not reported claims. These estimates are based on industry claim factors
provided by a plan administrator. Though changes in cost assumptions, as well as
changes in actual experience, could cause these estimates to change
significantly in the near term, the Company maintains stop loss insurance to
minimize the effect of large claims on its financial results. During 2000, 2001
and 2002, the Company incurred $540,000, $3.5 million, and $2.3 million,
respectively, in expenses related to this self-insured plan.
Workers' Compensation Insurance
We introduced a self-insured workers' compensation insurance plan on
December 1, 2000 for most domestic team members. Previous coverage was provided
through full premium-based policies. Team members in certain locations remain
covered under these premium-based policies. All self-insurance reserves include
accruals of estimated settlements for known claims, as well as accruals for
estimates of incurred, but not reported claims. These estimates are based on
industry claim factors provided by a plan administrator. Though changes in cost
assumptions, as well as changes in actual experience, could cause these
estimates to change significantly in the near term, the Company maintains stop
loss insurance to minimize the effect of large claims on its financial results.
During 2000, 2001 and 2002, the Company incurred $92,000, $1.0 million and $1.2
million, respectively, in expense related to this self-insured plan.
Benefit Plans
On April 1, 1999, we established a 401(k) profit sharing plan that covers
all domestic team members and all pre-existing plans were merged into this plan.
The plan permits employees to defer from 1% to 20% of eligible earnings, the
Company matches 50% of the first 6% of employee contributions, and employee
vesting in Company matching contributions occurs over a three-year period.
During 2000, 2001 and 2002, the Company incurred $424,000, $633,000 and
$617,000, respectively, in expense related to this plan.
Employment Agreements
We have entered into non-compete agreements with many of the former owners
of the companies that now comprise ResortQuest. These non-compete agreements are
generally three to five years in length effective the day the operations are
merged with ResortQuest. Additionally, we have entered into employment
agreements with many of these former owners, all senior corporate officers and
several key employees. Among other things, these agreements allow for severance
payments and some include acceleration of stock option awards upon a change in
control of ResortQuest, as defined under the agreements. At December 31, 2002,
the maximum amount of compensation that would be payable under all agreements if
a change in control occurred without prior written notice would be approximately
$4.3 million.
NOTE 9 - STOCKHOLDERS' EQUITY
Common Stock
ResortQuest is authorized to issue 50.0 million shares of common stock. At
December 31, 2001, ResortQuest had 19,243,249 shares of common stock issued and
outstanding (16,938,033 shares of common stock and 2,305,216 shares of
restricted common stock). At December 31, 2002, ResortQuest had 19,251,749
shares of common stock issued and outstanding (17,052,960 shares of common stock
and 2,198,789 shares of restricted common stock). The common stock and
restricted common stock are identical except that the holders of restricted
common stock are only entitled to one-half of one vote for each share on all
matters.
We have registered 8.0 million shares of common stock through various shelf
registration statement filings. As of December 31, 2001 and 2002, we had issued
3,289,487 shares under these shelf registration statements in connection with
acquisitions.
Preferred Stock
ResortQuest's authorized capital includes 10.0 million shares of
undesignated preferred stock with a $0.01 par value. On February 25, 1999, our
Board of Directors adopted a stockholder rights plan designed to protect our
stockholders in the event of takeover action that would deny them the full value
of their investment. Under this plan, a dividend distribution of one right for
each share of common stock was declared to holders of record at the close of
business on March 15, 1999. The rights will also attach to common stock issued
after March 15, 1999. The rights will become exercisable only in the event, with
certain exceptions, an acquiring party accumulates 15% or more of our voting
stock, or if a party announces an offer to acquire 15% or more of our voting
stock. The rights will expire on March 15, 2009. Each right will entitle the
holder to buy
34
Exhibit 13
one one-hundredth of a share of a new series of preferred stock at a price of
$87.00. In addition, upon the occurrence of certain events, holders of the
rights will be entitled to purchase either our stock or shares in an "acquiring
entity" at half of the then current market value of our common stock. We
generally will be entitled to redeem the rights at $0.01 per right at any time
until the date on which a 15% position in our voting stock is acquired by any
person or group.
NOTE 10 - STOCK OPTIONS
Options granted under our Long-Term Incentive Plan (the "Incentive Plan")
vest annually and ratably over a period from three to four years after the date
of grant and expire five to ten years after the grant date. ResortQuest has
reserved 15% of outstanding authorized common stock for use in connection with
the Incentive Plan and also provides for the issuance of stock appreciation
rights, restricted or deferred stock, dividend equivalents, bonus shares and
awards in lieu of our obligations to pay cash compensation, non-employee
directors' deferred shares or other awards. The value of the options is based in
whole or in part upon the value of the common stock.
A summary of ResortQuest's stock option transactions is as follows:
Weighted Common
Average Stock
Exercise Options Available
Price Outstanding For Grant
-------- ----------- ----------
Balance - December 31, 1999 $10.26 2,409,612 397,705
Approval of new options n/a -- 40,919
Granted 5.35 603,900 (603,900)
Cancelled 10.23 (337,424) 337,424
------ --------- ----------
Balance - December 31, 2000 $ 9.14 2,676,088 172,148
Approval of new options n/a -- 38,251
Granted 6.46 241,499 (241,499)
Exercised 8.73 (29,476) 29,476
Cancelled 10.52 (154,589) 154,589
------ --------- ----------
Balance - December 31, 2001 $ 8.88 2,733,522 152,965
Approval of new options n/a -- 1,275
Granted 3.97 420,500 (420,500)
Exercised 5.74 (8,500) 8,500
Cancelled 9.61 (1,227,663) 1,227,663
------ ---------- ----------
Balance - December 31, 2002 $ 7.34 1,917,859 969,903
====== ========== ==========
On October 28, 2002 the Company filed on Form SC TO-I a tender offer
statement under section 13(e)(4) of the Securities and Exchange Act of 1934.
This Tender Offer Statement on Schedule TO relates to an offer by the Company to
exchange all options outstanding under the ResortQuest International, Inc.'s
Amended and Restated 1998 Long-Term Incentive Plan having an exercise price
greater than $5.99 and held by its employees and directors, other than its
executive officers, for new options, to purchase shares of Common Stock to be
granted under the Plan, upon the terms and subject to the conditions described
in the tender offer to exchange. The number of shares of Common Stock subject to
the new options will be equal to a percentage of the number of share of common
stock subject to the options tendered and accepted for exchange. The percentage
is determined by the exercise price per share of the options tendered and
accepted for exchange. Options tendered for exchange during 2002 were 1,199,930
and are reflected as cancelled shares in the above table. The Company expects to
issue 340,065 new options in May 2003 at the then market price in exchange for
the options tendered.
The weighted average fair value of options granted by ResortQuest for 2000,
2001 and 2002 was $2.76, $4.05 and $2.36, respectively. Assumptions included an
average risk-free interest rate ranging from 2.6% to 6.8%; an average expected
life of 2.6 to 4.0 years; a volatility factor of 40.4% to 84.3%; and no
dividends. At December 31, 2002, there were 1,446,978 exercisable stock options
outstanding with exercise prices that range from $3.60 to $16.00 with a weighted
average exercise price of $8.18 and a weighted average remaining contractual
life of 4.0 years.
The following table summarizes information about all stock options
outstanding at December 31, 2002:
Weighted Average
-------------------------------
Number Remaining Exercise
Exercise Price Outstanding Contractual Life Price
--------------- ----------- ---------------- --------
$ 3.60 - $ 4.94 803,748 3.6 years $ 4.15
5.06 - 10.06 468,196 2.6 years 7.70
11.00 - 16.00 645,915 5.3 years 11.05
--------------- --------- --------- ------
$ 3.60 - $16.00 1,917,859 3.9 years $ 7.34
=============== ========= ========= ======
NOTE 11 - INCOME TAXES
35
Exhibit 13
The income tax provision, including the $1.9 million benefit on the
cumulative effect of a change in accounting principle, consisted of the
following:
Years Ended December 31,
(in thousands) 2000 2001 2002
------ ------ -------
Current
Federal $3,136 $(2,585) $(1,346)
State 965 (136) (465)
Deferred
Federal 3,401 4,638 (1,676)
State 355 411 (212)
------ ------- -------
Total $7,857 $ 2,328 $(3,699)
====== ======= =======
The difference between the statutory federal income tax rate and the
effective income tax rate expressed as a percentage of income before income
taxes, excluding the cumulative effect of a change in accounting principle, was
as follows:
Years Ended December 31,
2000 2001 2002
---- ---- ----
Federal statutory rate 35.0% 34.0% 34.0%
State and foreign income taxes, net of federal benefit 3.6 4.3 4.2
Goodwill and other permanent items 9.8 44.7 (19.2)
Adjustments to estimated income tax accruals (3.4) (23.8) 1.4
---- ---- ----
Effective income tax rate 45.0% 59.2% 20.4%
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of our deferred tax assets and liabilities were as follows:
As of December 31,
(in thousands) 2001 2002
-------- --------
Deferred tax assets:
Claims and other reserves $ 731 $ 724
Federal net operating losses -- 5,923
State net operating losses 710 981
Other 137 386
-------- --------
Total deferred tax assets $ 1,578 $ 8,014
======== ========
Deferred tax liabilities:
Deductible goodwill amortization $ (3,127) $ (5,339)
Basis difference on fixed assets (6,480) (4,650)
Other -- (170)
-------- --------
Total deferred tax liabilities (9,607) (10,159)
-------- --------
Net deferred tax liabilities $ (8,029) $ (2,145)
======== ========
NOTE 12 - EARNINGS PER SHARE
In accordance with the provisions of Statement No. 128, "Earnings Per
Share," we compute our basic earnings per share by dividing Net income by the
number of weighted average common shares outstanding during the year. Our
Diluted earnings per share is computed by dividing Net income by the number of
weighted average common stock equivalents outstanding during the year. Common
stock equivalents consisted solely of stock options outstanding under our
Incentive Plan (see Note 10). Stock options with an exercise price greater than
the market price are considered anti-dilutive and are not included in the common
stock equivalent calculation. The anti-dilutive options were 2,172,588 for 2000;
1,878,737 for 2001, and 1,104,111 for 2002. Common stock equivalents are not
considered in the diluted share calculation for periods where a net loss is
recorded. The following summarizes the weighted average shares:
Years Ended December 31,
2000 2001 2002
---------- ---------- ----------
Basic weighted average common shares outstanding 18,962,752 19,167,203 19,248,828
Effect of dilutive securities - stock options 54,919 175,616 121,266
---------- ---------- ----------
Diluted weighted average common shares outstanding 19,017,671 19,342,819 19,370,094
========== ========== ==========
NOTE 13 - SEGMENT REPORTING
36
Exhibit 13
ResortQuest has one operating segment, property management, which is
managed as one business unit. The Other segment includes ResortQuest
Technologies and corporate. At December 31, 2000, 2001 and 2002, approximately
64%, 47% and 54%, respectively, of the Other segment assets represent goodwill
recorded for ResortQuest Technologies and corporate. The following table
presents the revenues, operating income and assets of ResortQuest's reportable
segment:
Years Ended December 31,
(in thousands) 2000 2001 2002
-------- -------- --------
Revenues
Property management $179,783 $189,526 $187,095
Other 3,478 3,429 3,146
-------- -------- --------
$183,261 $192,955 $190,241
======== ======== ========
Operating income (loss)
Property management $ 31,892 $ 26,976 $ 25,877
Other (9,615) (18,400) (28,696)
-------- -------- --------
$ 22,277 $ 8,576 $ (2,819)
======== ======== ========
Assets
Property management $218,338 $245,482 $229,773
Other 44,831 58,792 43,780
-------- -------- --------
$263,169 $304,274 $273,553
======== ======== ========
NOTE 14 - RELATED-PARTY TRANSACTIONS
During 2000 and 2001, ResortQuest had significant transactions with three
related parties and their affiliates, who had served the Company as directors.
During 2002, ResortQuest had significant transactions with two related parties
and their affiliates, a current director and the former owner of Aston Hotels &
Resorts ("Former Owner").
ResortQuest has consulting and management agreements with related parties
that includes assistance in operations, identifying acquisitions and involvement
in local and governmental affairs. During 2000, 2001 and 2002, we incurred
$215,000, $312,000 and $178,000, respectively, relative to these consulting
agreements.
ResortQuest receives sales commissions for selling properties developed by
a related party and his affiliates. These net commissions approximated $1.5
million and $1.4 million during 2000 and 2001, respectively.
ResortQuest entered into numerous transactions with the Former Owner and
his affiliates. ResortQuest provides management and centralized services
(cooperative sales and marketing, reservations, accounting services and other
reimbursements) for four hotels, two of which are owned by the Former Owner and
two of which are managed for an affiliate of the Former Owner. The management
fees charged to these hotels approximated $1.1 million, $1.2 million and
$809,000 in 2000, 2001 and 2002, respectively. Additionally, ResortQuest
provides administrative services to AST International LLC, a company that is
controlled by the Former Owner. Related to these services, we recognized
$42,000, $29,000 and $11,000 of revenue during 2000, 2001 and 2002,
respectively.
ResortQuest provides consulting and management services to entities owned
by a former director. During 2000 and 2001, we received $368,000 and $216,000,
respectively, relative to these consulting agreements. ResortQuest also manages
vacation properties pursuant to its standard management agreement that are owned
or co-owned by related parties and employees of the Company.
37
Exhibit 13
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ResortQuest International, Inc.
Memphis, Tennessee
We have audited the accompanying consolidated balance sheet of ResortQuest
International, Inc. and subsidiaries ("the Company") as of December 31, 2002,
and the related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of
ResortQuest International, Inc. as of December 31, 2001, and for the years ended
December 31, 2001 and 2000, before certain revisions described in Note 2, were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements in their report dated
February 19, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements present fairly,
in all material respects, the financial position of ResortQuest International,
Inc. and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed above, the consolidated financial statements of ResortQuest
International, Inc. as of December 31, 2001, and the years ended December 31,
2001 and 2000 were audited by other auditors who have ceased operations. As
described in Note 2, these financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," (SFAS 142) which was adopted by
the Company as of January 1, 2002. Our audit procedures with respect to such
disclosures in Note 2 with respect to 2001 and 2000 included (i) comparing the
previously reported net income to the previously issued financial statements and
the adjustments to reported net income representing goodwill amortization
expense (including any related tax effects) recognized in those periods related
to goodwill to the Company's underlying analysis obtained from management, and
(ii) testing the mathematical accuracy of the reconciliation of reported net
income to adjusted net income, and the related per-share amounts. In our
opinion, the disclosures discussed for 2001 and 2000 in Note 2 are appropriate.
However, we were not engaged to audit, review or apply any procedures to the
2001 and 2000 consolidated financial statements of the Company other than with
respect to such adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 and 2000 consolidated financial
statements taken as a whole.
Additionally, as also described in Note 2, the 2001 and 2000 consolidated
financial statements have been revised to include the comparative
reclassification adjustments resulting from the Company's adoption of the
Financial Accounting Standards Board's Emerging Issues Task Force ("EITF")
Consensus No. 01-14, Income Statement Characterization of Reimbursements
Received for `Out of Pocket' Expenses Incurred, that was effective January 1,
2002. We audited the adjustments that were applied to restate the 2001 and 2000
other revenue from managed entities and other expenses from managed entities
reflected in the 2001 and 2000 consolidated statements of operations. Our
procedures included (i) agreeing the adjusted amounts of other revenues from
managed entities and other expenses from managed entities to the Company's
underlying accounting records obtained from management, and (ii) testing the
mathematical accuracy and validity of these underlying accounting records. In
our opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review or apply any procedures to the
2001 and 2000 consolidated financial statements of the Company other than with
respect to such adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 and 2000 consolidated financial
statements taken as a whole.
As discussed in Note 2 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche LLP
Memphis, Tennessee,
March 19, 2003
38
Exhibit 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of ResortQuest International, Inc.:
We have audited the accompanying consolidated balance sheets of ResortQuest
International, Inc. (a Delaware corporation) and subsidiaries (the "Company") as
of December 31, 2001, and 2000, and the related consolidated Statements of
Operations, changes in stockholders' equity and comprehensive income and cash
flows for each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ResortQuest International, Inc. and subsidiaries, as of December 31, 2001, and
2000, the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Memphis, Tennessee,
February 19, 2002.
EXPLANATORY NOTE REGARDING REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
On May 29, 2002, ResortQuest International, Inc. decided to terminate
Arthur Andersen LLP as the Company's independent auditor and engaged Deloitte &
Touche LLP to serve as its independent auditors for the year ending December 31,
2002. More information regarding ResortQuest International, Inc.'s change in
independent auditors is contained in a current report on Form 8-K filed with the
SEC on May 31, 2002.
We could not obtain permission of Arthur Andersen LLP to the inclusion in
this Annual Report and on Form 10-K of their Independent Auditors Report.
Accordingly, the Arthur Andersen LLP Independent Auditors Report herein is
merely reproduced from ResortQuest International, Inc.'s Annual Report and Form
10-K for the year ended December 31, 2001 (although the consolidated balance
sheet as of December 31, 2000 and the consolidated Statements of Operations,
changes in shareholder's equity, and cash flows for the year ended December 31,
1999 referred to in that report are not included herein) and does not include
the manual signature of Arthur Andersen LLP. The conviction of our former
independent auditors, Arthur Andersen LLP, on federal obstruction of justice
charges may adversely affect Arthur Andersen LLP's ability to satisfy any claims
arising from the provision of auditing services to us and may impede our access
to the capital markets.
39
Exhibit 13
Quarterly Results of Operations
(unaudited)
First Second Third Fourth
(in thousands, except per share amounts) Quarter Quarter Quarter Quarter
------- ------- ------- -------
2002
Revenues before other revenues
from managed entities $ 40,513 $ 39,876 $ 48,396 $ 24,952
Operating income (loss) 5,606 4,938 10,326 (23,689)
Cumulative effect of change in
accounting principle 6,280 -- -- --
Net income (loss) (3,693) 2,234 5,440 (17,465)
Basic earnings (loss) per share (a) (0.19) 0.12 0.28 (0.91)
Basic weighted average shares outstanding 19,243 19,248 19,252 19,252
Diluted earnings (loss) per share (a) (0.19) 0.12 0.28 (0.91)
Diluted weighted average shares outstanding 19,352 19,387 19,255 19,252
2001
Revenues before other revenues
from managed entities $ 45,442 $ 43,398 $ 48,682 $ 23,434
Operating income (loss) 8,253 6,443 5,770 (11,890)
Net income (loss) 4,331 3,019 466 (6,215)
Basic earnings (loss) per share (a) 0.23 0.16 0.02 (0.32)
Basic weighted average shares outstanding 19,043 19,142 19,242 19,243
Diluted earnings (loss) per share (a) 0.23 0.16 0.02 (0.32)
Diluted weighted average shares outstanding 19,182 19,414 19,400 19,243
2000
Revenues before other revenues
from managed entities $ 38,547 $ 40,840 $ 47,014 $ 25,613
Operating income (loss) 6,512 6,424 12,578 (3,238)
Net income (loss) 2,851 2,832 6,403 (2,480)
Basic earnings (loss) per share (a) 0.15 0.15 0.34 (0.13)
Basic weighted average shares outstanding 18,831 19,013 19,020 18,988
Diluted earnings (loss) per share (a) 0.15 0.15 0.34 (0.13)
Diluted weighted average shares outstanding 18,851 19,059 19,082 18,988
(a) The sum of the quarterly amounts may not equal the annual amount reported,
as per share amounts are computed independently for each quarter while the full
year is based on the annual weighted average shares outstanding.
Stock Price
2002 High Low
- ---- ------ ------
Fourth Quarter $ 4.85 $ 3.48
Third Quarter 5.73 3.69
Second Quarter 8.05 5.70
First Quarter 7.40 4.87
2001 High Low
- ---- ------ ------
Fourth Quarter $ 5.66 $ 2.70
Third Quarter 11.32 3.00
Second Quarter 13.00 8.30
First Quarter 9.00 6.06
2000 High Low
- ---- ------ ------
Fourth Quarter $ 7.44 $ 5.50
Third Quarter 6.69 5.00
Second Quarter 7.13 4.69
First Quarter 7.38 4.13
40
Exhibit 13
SELECTED FINANCIAL DATA
(unaudited)
Years Ended December 31,
(in thousands) 1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
Statements of Operations data:
Revenues before other revenues
from managed entities $ 55,359 $ 127,912 $ 152,014 $ 160,956 $ 153,737
Operating expenses before other
expenses from managed entities 31,596 65,804 80,314 83,838 83,607
General and administrative expenses,
including depreciation and
amortization 18,273 48,578 49,423 68,542 72,949
--------- --------- --------- --------- ---------
Income (loss) from operations 5,490 13,530 22,277 8,576 (2,819)
Interest and other expense, net 507 4,228 4,814 4,647 6,233
Provision (benefit)for income
taxes 1,518 4,873 7,857 2,328 (1,848)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations 3,465 4,429 9,606 1,601 (7,204)
Income from discontinued operations 1,347 -- -- -- --
Cumulative effect of a change in
accounting principle -- -- -- -- (6,280)
--------- --------- --------- --------- ---------
Net income (loss) $ 4,812 $ 4,429 $ 9,606 $ 1,601 $ (13,484)
========= ========= ========= ========= =========
Earnings (loss) per share:
Basic $ 0.44 $ 0.25 $ 0.51 $ 0.08 $ (0.70)
========= ========= ========= ========= =========
Diluted $ 0.44 $ 0.24 $ 0.51 $ 0.08 $ (0.70)
========= ========= ========= ========= =========
Working capital deficit $ (2,080) $ (7,295) $ (23,963) $ (29,251) $ (36,449)
========= ========= ========= ========= =========
Total assets $ 188,219 $ 257,675 $ 263,169 $ 304,274 $ 272,785
========= ========= ========= ========= =========
Long-term debt,
net of current maturities $ 38,098 $ 68,090 $ 50,401 $ 78,644 $ 75,045
========= ========= ========= ========= =========
Stockholders' equity $ 106,855 $ 125,823 $ 136,402 $ 139,914 $ 126,484
========= ========= ========= ========= =========
41
Exhibit 13
Stock Listing
The Company's stock is traded on the New York Stock Exchange under the symbol
RZT.
Registrar and Stock Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Independent Auditors
Deloitte & Touche LLP
50 North Front Street, Suite 600
Memphis, Tennessee 38103
Stockholder Inquiries
For information about ResortQuest International, Inc. and its subsidiaries,
including copies of its annual report on Form 10-K and quarterly reports on Form
10-Q, please submit a written request to:
Investor Relations
ResortQuest International, Inc.
530 Oak Court Drive, Suite 360
Memphis, Tennessee 38117
After July 1, 2003 the corporate offices will be located in Destin, Florida and
all inquiries after this date should be directed to:
Investor Relations
ResortQuest International, Inc.
8955 Highway 98 West
Destin, Florida 32541
Annual Meeting Date
ResortQuest International will hold its annual meeting of stockholders on May
14, 2003, at nine o'clock a.m. at the Embassy Suites, 1022 S. Shady Grove,
Memphis, Tennessee.
Forward-Looking Statements
Certain statements in this annual report include "forward-looking statements"
within the meaning of the safe harbor provisions of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
and are qualified by cautionary statements contained herein and in ResortQuest
International, Inc. filings with the Securities and Exchange Commission. We
undertake no obligation to update forward looking statements, whether as a
result of new information, future events or otherwise.
42